Should Central Banks Abandon Their Expansionary Policies Given That They Seem to Be Ineffective and Might Lead to Inflation?
L12417
Despite the unprecedented interventions by central banks following the onset of subprime crisis, world economy remains fragile. There are also persistent fears that these interventions will lead to inflation. Should central banks abandon their expansionary policies given that they seem to be ineffective and might lead to inflation? 2011
Monetary Economics
Group Essay
Ayeshath Iqbal
Chowdhury Mohammad Sakib Anwar
Esther Siah Shuet Yi
Jarren Tam Keat Wen
Lim Kai Shen
Paul Ruben Mohanadasan
The University of Nottingham Malaysia
Contents Introduction 3 Contents 4 Monetary Policy as conducted by the Central Banks 4 Open Market Operations (OMO) 4 Cash Reserve Ratio 5 Interest Rates 6 Quantitative Easing 8 Critical Analysis of the Effectiveness of Monetary Policy 9 Conclusion 13 Bibliography 14
Introduction During the recent global financial crisis, increased uncertainty of loan defaults resulted in reluctance of banks to issue loans. Among other reasons, this stagnation of the financial market worsened economic stability and contributed to the recession that economies worldwide are still fighting to overcome today. With the decline in consumer confidence and freeze up of the interbank market, the responsibility fell on central banks to take bold and drastic steps to correct the failing economy. In our essay, we outline the expansionary monetary tools used by the central bank which include open market operations (OMO), cash reserve ratio, interest rates and quantitative easing (QE). We discuss the resulting effects on the economy and conclude by critically analysing the effectiveness of these policies.
Contents
Monetary Policy as conducted by the Central Banks
Open Market Operations (OMO)
Open market operations are primarily used to control interest rates and indirectly the total supply of money in the market. It can also control the targeted rate of inflation. The Federal Open Market Committee (FOMC)
Despite the unprecedented interventions by central banks following the onset of subprime crisis, world economy remains fragile. There are also persistent fears that these interventions will lead to inflation. Should central banks abandon their expansionary policies given that they seem to be ineffective and might lead to inflation? 2011
Monetary Economics
Group Essay
Ayeshath Iqbal
Chowdhury Mohammad Sakib Anwar
Esther Siah Shuet Yi
Jarren Tam Keat Wen
Lim Kai Shen
Paul Ruben Mohanadasan
The University of Nottingham Malaysia
Contents Introduction 3 Contents 4 Monetary Policy as conducted by the Central Banks 4 Open Market Operations (OMO) 4 Cash Reserve Ratio 5 Interest Rates 6 Quantitative Easing 8 Critical Analysis of the Effectiveness of Monetary Policy 9 Conclusion 13 Bibliography 14
Introduction During the recent global financial crisis, increased uncertainty of loan defaults resulted in reluctance of banks to issue loans. Among other reasons, this stagnation of the financial market worsened economic stability and contributed to the recession that economies worldwide are still fighting to overcome today. With the decline in consumer confidence and freeze up of the interbank market, the responsibility fell on central banks to take bold and drastic steps to correct the failing economy. In our essay, we outline the expansionary monetary tools used by the central bank which include open market operations (OMO), cash reserve ratio, interest rates and quantitative easing (QE). We discuss the resulting effects on the economy and conclude by critically analysing the effectiveness of these policies.
Contents
Monetary Policy as conducted by the Central Banks
Open Market Operations (OMO)
Open market operations are primarily used to control interest rates and indirectly the total supply of money in the market. It can also control the targeted rate of inflation. The Federal Open Market Committee (FOMC)
Bibliography: China 's Central Bank cuts interest rates. (26 November, 2008). Retrieved 9 November, 2011, from The New York Times: http://www.nytimes.com/2008/11/27/business/worldbusiness/27yuan.html Fed cuts key rate to a record low UK interest rates lowered to 0.5%. (5 March, 2009). Retrieved 20 November, 2011, from BBC News: http://news.bbc.co.uk/2/hi/business/7925620.stm China Government Bond Yield How do Open Market Operations affect US money supply? (n.d.). Retrieved 22 November, 2011, from http://www.investopedia.com/ask/answers/06/openmarketoperations.asp#axzz1d0y1pcL3. Public Data. (n.d.). Retrieved 22 November, 2011, from Google: www.google.com.my/publicdata Quantitative Easing Suranovic, S. M. (n.d.). International Finance Theory and Policy. Retrieved 07 November, 2011, from InternationalEcon.com: http://internationalecon.com/Finance/Fch40/F40-9.php T-Bills - What Are U.S United States Inflation. (n.d.). Retrieved 21 November, 2011, from Trading Economics: http://www.tradingeconomics.com/united-states/inflation-cpi US-China Trade Statistics and China 's World Trade Statistics