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Easy Money Policy

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Easy Money Policy
Easy Money Policy

Fall 2012
MGT 330
Lu Shen
Dec.16.2012

An “easy money policy” is a form of policy, where a central financial authority, such as the Federal Reserve System, in the case, for the United States of America, attempts to increase the cash flow within the economy, as well as making it available, at minimal rates. The main aim of the easy money policy is to create confidence in national investments and consequently, spur economic growth. On the other hand, an easy money policy often, tends to act as a guide to inflation (Gourincha, 7). As indicated above, the basic resultant effect of an easy money policy is to keep the interest rates, at a minimum. However, discourse on the late 2000 financial crisis and other financial crises, indicate that, lower than optimal interest rates, play significant role in the development of financial crises, since, they tend to motivate the corporate market players, to engage in excessive risk taking activities. Usually, the interest rate policy, directly affects risk, when the government changes the amount of safe bonds, which the corporate market players use as collateral, in the repo market. In addition, the corporate market players are bound to augment their collateral, by issuing assets, of which, the credit rating agencies, have significantly undermined their risk. The latter situation was excessively present, prior to the 2007 financial crisis. The presence of significantly wrongly valued collateral, increase the potential of the lower than optimal interest rates, that facilitate excessive risk taking and further worsen, the severity of the recessions (Carney, 9). One significant way in which easy money policy plays its role in causing financial crisis, is through the manipulation of time value. The time value is characterized as the dynamics in value of commodities, at different periods in time (Mishkin, 8). This mainly arises, because of the aspect of time preference, in that, consumers



Cited: White, William. Ultra Easy Monetary Policy and the Law of Unintended Consequences. Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute. Working Paper No. 126. 2012. Print. Fang, Fang..Monetary Policy in China Coping With the Global Financial Crisis. M & D Forum. 231-237. 2010. Carmassi, Jacopo, Daniel Gros and Stefano Micossi The Global Financial Crisis: Causes and Cures. Journal of common market studies. 47(5):977-996. 2009. Mohanty, Deepak: Lessons for monetary policy from the global financial crisis - an emerging market perspective. BIS central bankers’ speeches. Paper presented at the Central Banks Conference of the Bank of Israel, Jerusalem, 1 April 2011. Carney M. “Some Considerations on Using Monetary Policy to Stabilize Economic Activity”, Remarks at the symposium on Financial stability and macroeconomic policy sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 22 2009. Bech, L M, Leonardo Gambacorta, and Enisse Kharroubi. Monetary Policy in a Downturn: Are Financial Crises Special?Basel: Bank for International Settlements, Monetary and Economic Dept, 2012. Internet resource. Taylor, John B. The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. Cambridge, Mass: National Bureau of Economic Research, 2009. Internet resource. Gourinchas, Pierre-Olivier. U.S. Monetary Policy, ‘Imbalances’ and the Financial Crisis. Financial Crisis Inquiry Commission Forum. Washington DC. February, 2010. Reinhart, Carmen and Vincent Reinhart. Limits of Monetary Policy in Theory and Practice. Cato Journal, Vol. 31(3). 2011. Mishkin, Frederic. Monetary Policy Strategy: Lessons from the Crisis. Graduate School of Business, Columbia University and National Bureau of Economic Research December 2010.

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