In the height of the financial crisis in 2008, the Federal Open Market Committee decided to lower overnight interest rates to zero to help with easing of money and credit. Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labour market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market
Resulting in a financial crisis as the government and banks had failed to constrain the financial system’s creation of private credit and money. The lack of responsibility in the government and banks led to the downturn in the economy now known as the great recession. (document I) Starting in 2007 there was a noticeable increase in mortgage
1.1 Background of the Study Monetary policy deals with measures taken to regulate the supply of money, the cost and availability of credit as well as the lending and borrowing rates of interest of banks (Ahuja, 2009). Monetary policy is an anti-cyclical policy used to overcome economic depression. The monetary policy is aimed at price stability, stability of exchange rate and overall economic growth. On the other hand, fiscal policy is the use of taxation, public borrowing, and public expenditure of government for purposes of economic stabilization (Jhingan, 2003). Fiscal policy promotes and accelerates the growth of investment; it could also be used to discourage undesirable investments.
What are Monetary policies? Monetary policies is that strategy by that financial authority of a country, typically a financial management regulates the supply of money at intervals by its management over interest rates therefore on maintaining value stability and attain high process. Further it also deals with the distribution of credit between uses and users and also with both the lending and borrowing rates of interest of the banks. In developed countries the monetary policy has been usefully used for the overcoming depression and inflation as an anti-cyclical policy. But in developing countries it has to play a significant role in promoting economic growth.
Xu and Chen (2012) find that China monetary policy actions are the key driving forces behind the change of real estate price growth in China. Their empirical results show that expansionary monetary policy tends to accelerate the subsequent home price growth, while restrictive monetary policy tends to decelerate the subsequent home price growth. Iacoviello and Neri (2010) find that while monetary policy played a minor role in the run-up of house prices, it accounted for the entire reversal of house prices from 2005 to 2006. Negro and Otrok (2005) study the effects of monetary policy on regional housing price in American. They explain the heterogeneity across states in the current house prices by the different exposures to national shocks.
3. The Federal Reserve controls the monetary base through open market operations and extensions of loans to financial institutions, and has better control over the monetary base than over reserves. Although float and Treasury deposits with the Fed undergo substantial short-run fluctuations, which complicate control of the monetary base, they do not prevent the Fed from accurately controlling it. 4. A single bank can make loans up to the amount of its excess reserves, thereby creating an equal amount of deposits.
Monetary policy Monetary policy is the tools used by central banks to control the quantity of money, often targeting an inflation rate or interest rate to ensure price stability. In the short run, monetary policy influences inflation and the economy-wide demand for goods and services, therefore, the demand for the employees who produce those goods and services primarily through its influence on the financial conditions facing households and firms. Monetary policy also has an important influence on inflation. When the associated funds rate is reduced, the resulting stronger demand for goods and services tends to push wages and other costs higher, reflecting the greater demand for workers and materials that are necessary for production. It consist
Inflation is also an ill for the growth of an economy. While looking at the relationship, the writers had to be also looking into other variables such as investment and capital formation of the economy. Throughout the study, the movement of inflation and economic growth, fact concrete conclusion is inverse relationship can be easily inferred. During the 1970s (in this period) inflation and economic growth had positive relationship, after this period the rates started to be high later the studies conclude it to be a negative relationship. Similarly, there is a structural breakeven point effect positive when inflation in 2%, breakeven when inflation rate equals 2% and negative when more than 2%.
So to overcome this a country can either use Monetary or Fiscal policy to stabilize the economy. If the country choose to use monetary policy the central bank should balance the price and output levels. Since there is more money circulation in the economy the central bank will have to adapt
Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.