The unconventional monetary policies implemented by the Bank of England, U.S. Federal Reserve and the European Central Bank in response to the financial crisis The signification of the financial crisis followed the collapse of Lehman Brothers in September 2008 caused the decrease in the market activity and the growth of globalization economy. A vast of problems, such as deflation, reduction in capital liquidity and so forth, confront with each government and central bank as well as having significant negative effect on development of economy that lowering of GDP. After the financial crisis erupting and spreading to all around the world’s financial condition, some measures for example, lowering of interest rate and keeping the reserve requirement lowing, implemented by central banks aimed at stabilize market price and funds liquidity to support aggregate demand. However, actually, the central banks’ interest rate is very low in United Kingdom, European system and United Stated, which is closing to zero bound, so that it is difficult for central banks to maintain financial condition and support a further stimulation via tool of interest rate (Benford et al, 2009). Meanwhile, commercial banks reduced the aggregate of bank loans in order to remain sufficient reserve and prevent their value of assets, because not enough money expand their investment to profit with high risk investing environment. Therefore, Bank of England, European Central Bank and U.S. Federal Reserve generate a series of non-standard monetary policies called unconventional monetary policies to avoid the threat of a liquidity trap (Loisel and Mesonnier, 2009). This essay will discuss what unconventional monetary policies implemented by Bank of England, European... ... middle of paper ... ...8, 2009. 5. Curdia. V, and M. Woodford, 2010. Conventional and Unconventional Monetary Policy. Federal Reserve Bank of St. Louis Review, 92 (4), pp.229-264. 6. European Central Bank, 2010. The ECB’s Response to The Financial Crisis. ECB Monthly Bulletin. 7. Fleming, Michael J, W. B, Hrung, and F. M, Keane, 2010. Repo Market Effects of the TSLF. American Economic Review, 100 (2), pp.591-596. 8. Joyce. Michael. A. S, A. Lasaosa, I. Stevens, and M. Tong, 2011. The Financial Market Impact of Quantitative Easing in the United Kingdom. International Journal of Central Banking, 7 (3), pp.113-161. 9. Loisel. O, and J. S, Mesonnier, 2009. Unconventional Monetary Policy Measures In Response to the Crisis. Banque of France, NO.1, pp. 1-13. 10. Meier. A, 2009. Panacea, Curse, or Nonevent? Unconventional Monetary Policy in the United Kingdom. International Monetary Fund .
Some economists blame the Federal Reserve’s inaccurate monetary policy. The easy-monetary policy since 2001 was deviating from the Taylor rule. (Alex, 2013)
Mallin, Jay. "Federal Reserve (Fed).” The New York Times, n.d. Web. March 21, 2012. .
In the past, the system of monetary policy is based on the Classical Gold Standard. In the article, “Review of: European monetary union: Lessons from the classical gold standard”, Stanley W stated how the gold standard lasted from the periods of 1880 to 1913. In the beginning, central banks used interest rates to drive short term capital inflows, which avoided gold movements and made sure that the prices adjust relatively. However, this adjustment process didn’t work. The author then argued that long term international capital flows, migration, and differences in tariff barriers, also known as the “Three Pillars of the Classical Gold Standard”, contributes to the reason why developing countries were able to maintain their current account deficits until they could face the competition with the modernized countries. However, in accordance to the article “Interest rate interactions in the classical gold standard, 1880-1914: Was there any monetary independence?” by Bordo and Macdonald, the Classical Gold Standard is not a sustainable monetary system because it required some countries to be independent when monetary policy operates. This is especially conflicting in the modern day structure in which central banks need to use a targeting zone to achieve their purpose. In the modern era, quantitative easing (QE) is an unconventional type of monetary policy used by the Federal Reserve to respond to the deep recession. According to the article “Quantitative easing and Proposals for Reform of Monetary Policy Operations: by authors Scott and L.Randall, the impact of conducting QE on interest rates is lower long term yields when compared to the short term ones. As noted by authors Bora, Omar and Georges in their article “Financial Crisis and...
The unconventional monetary policy took by ECB from 2008 to 2012 is shown as below.
Mishkin. F. C. (2009). The Financial Crisis and the Federal Reserve. NBER Macroeconomics Annual, 24, 495-508
When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.
Different economies in the world experience varying economic difficulties demanding for varying solutions. The economic problems vary with the economical stability of the particular country and the ability to take adequate preventive measures. This has driven the economists to classify the monetary policies into different categories. Here are some of the types of monetary policy:
In Ackley's view, monetary policy is viewed as being a cautious effort by monetary authorities (C. B. N) to control or regulate the stock of money or credit conditions for the tenacity of achieving certain economic objective. One objective of monetary policy is the realization of the high rate of or full employment, this doesn’t suggest that there is zero unemployment since there is always an amount of friction due to voluntary or seasonal unemployment (Ackley, 1978).
The Federal Reserve system can use either an expansionary or contractionary policy in their efforts to keep the macroeconomy as stable as possible. The four tools used to help with these efforts are: “open market operations, changes in the reserve ratio, changes in the interest rates paid on reserves, and discount rate changes” (352).
Labonte, M. (January 7, 2014). Monetary Policy and the Federal Reserve; Current Policy and Conditions. Congressional Research Service.
Ross Heard. 2013. QE: a timeline of quantitative easing in the US. Open Economy. Retrieved from http://www.opendemocracy.net/openeconomy/ross-heard/qe-timeline-of-quatitative-easing-in-us
Central Banks have served as governments' personal banks since their creation, beginning with Sweden's Riksbank in 1668. However, as central banks have developed in the modern world, their goals as well as their tools have also evolved. When the Federal Reserve was created as the United States’ central bank in 1913, its purpose was simply to promote economic stability after the economic crisis of 1907. Then, when the European Central Bank, or the ECB, was created in 1998, their main purpose was to establish monetary policy. While the European Central Bank and the United States Federal Reserve were created with different intentions, current economic situations and an increasingly global economy are forcing the organizations to become more and more alike as they face similar challenges. However, while these banks have similar goals, their approach to the same problem often differs.
Impact of monetary policy on the economy a regional Fed perspective on inflation, unemployment, and QE3 : Hearing before the Subcommittee on Domestic Monetary Policy and Technology of the Committee on Financial Services, U.S. House of Representatives, One. (2011). Washington: U.S. G.P.O.
Smaghi, L. (2009, Aprl 28). Conventional And Unconventional Monetary Policy. Speech at the International Centre for Monetary and Banking Studies (ICMB), Geneva. Retrieved from http://www.bis.org/review/r090429e.pdf
Svensson, Lars E. O. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others." The Journal of Economic Perspectives 17.4 (2003): 145-66. ProQuest. Web. 1 Dec. 2013.