CHAPTER ONE: INTRODUCTION AND BACKGROUND
1.0 INTRODUCTION
Monetary policy and the yield curve have long been a subject to interest by researches and the debate has generated many, but, diverse conclusions. Monetary policy forms part of overall economic policy pursued by the monetary authorities independently of the government. In South Africa it is called the South African Reserve Bank (SARB) due toVan der merwe and Mollentze (2010). The monetary policy is the control of monetary variables such as monetary aggregate or interest rates to achieve economic growth by ensuring price stability, employment growth, interest rates stability, financial market stability and stability in the foreign exchange market Mishkin (2009), in south Africa the
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However, Nel’s study only covers the period between 1974 and 1993 and is outdated since major structural changes took place in South Africa's economy since 1994.
Moolman (2002) only uses the slope of the yield curve predict recessions and does not compare its performance with other financial indicators to see if the yield spread does better. Several studies in other countries show that economic indicators like stock prices, money supply growth, leading economic indicator indices, spreads between government and commercial paper and foreign term spreads also possess useful information for predicting the business cycle (see Dueker, 1997; EstreJla and Mishkin, 1998; Atta-Mensah and Tkacz, 1998; Moneta, 2003). It would be interesting to find out if such variables perform better than the yield in South Africa. One other limitation of Moolman's study is that it does not cover one crucial period (2003) when the yield curve
The United States of America is known to be the land of opportunity, and many presidents tried different kind of methods to change the US economy to the better. The Reganomics policy which is a policy by president Regan on how to change the course of the US economy. The Reganomics had good policies that made sense like reducing the growth of government spending which was a good point in order for the government to save its money. Reduce the marginal tax rates on income from both labor and capital which could help them pay less tax, and also reduce regulation which could benefit the people of the US, and also reduce inflation by controlling the growth of the money supply. This is an important fact because the growth of the money supply is very important.
The goals for the monetary policy is to maximize employment, stable prices and moderate long term interest in the federal reserve act. The federal open market committee (FOMC) gave these goals to them. The FOMC seeks to explain its monetary policies to the public clearly. It is important to clearly explain the monetary policy decisions for Many reasons.
The Federal Reserve controls over the federal fund rates give it the ability to influence the general level of short-term market interest rates. The Fed has three main tools at its disposal to influence monetary policy which are the open-market operations, discount rate, and reserve requirements. b. Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and rate of the money supply, which in turn affects interest rates. The concept of Monetary Policy simply stated is that the cost of credit is reduced, more people and firms will borrow money and the economy will heat up. c. The controls that Federal Reserve used worked because the use of the three main tools the Fed uses is the most important that can manipulate monetary policy.
I emptied my pockets. Sure enough, they were full of useless junk. Upon closer inspection, in the depths of my front pocket, I found a single copper coin. Just enough to purchase one small piece of candy. My craving could finally be satisfied.
How significant is the penny for you? In the 1970’s, two pennies would buy a newspaper from the street vendor. These days, people don’t even bother picking up pennies off the street. Should the penny be retired? The penny was the first currency of any type authorized by the United States, and for over two centuries, the penny's design has symbolized the spirit of the nation.
On December 23rd, 1913, President Woodrow Wilson signed the Federal Reserve act. This act created the Federal Reserve, which is a central bank of the United States. It has a Federal Reserve Board in Washington D.C. along with twelve regional banks located all across the country. The Federal Reserve has two main jobs. One job is to regulate all banks in the United States and ensure the health of the banking system overall.
John Maynard Keynes was born on the 5th of June 1883 in Cambridge, England. He was the eldest of 3 children who were born into an Upper middle class family. John Neville Keynes, his father, was an economist and a lecturer in Moral Science at The University of Cambridge. John Maynard Keynes is widely known as the father of modern macroeconomics due to his ideas that revolutionized macroeconomics during the 1930s. He was a policy-oriented economist who concentrated on the economic policy of the Government and Macroeconomics.
The penny is one of the coins with the biggest history and American Cultural Influence for over 200 years. Have you ever heard the phrase, “A penny for your thoughts?” You probably have a lot of those measly small round coins on your dresser or stuck in between your living room couch. We don’t use them for much, but if counted al together, you can help a charity or a hospital in desperate need of money.
Timberlake continues to state, “The Fed [Federal Reserve], having complete control over the quantity of dollars, controls the money market. It can and must use that control for just one goal: stability in the price level and the value of the dollar. ”(p.310) Read that last quote just one more time. “The Fed, having complete control over the quantity of dollars” The Federal Reserve has absolute power over every single aspect of our economy, yet there have been economic collapses of enourmous proportions over the past 80 years.
Along the same line of thinking for protecting the freedoms of the people, the government creates and enforces the law of the market but should not directly participate in the game (Friedman, 1975). Intervention as a discrepancy from Friedman’s theory is understood as the Federal Reserve keeping interest rates low prior to the crisis. This will be discussed later in the
During inflation consumers will start to see the prices in goods and services to go up over a period. Monetary policies are when the central bank of a country determine the size and rate of growth of the money supply. After the central bank
To conduct the nation’s monetary policy is to “promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;” (Board). The Federal Reserve promotes the stability of the financial system. Promoting the stability of the financial system is to seek to “minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;” (Board). The Federal Reserve promotes the safety and soundness of individual financial institutions, “and monitors their impact on the financial system as a whole;” (Board). The Federal Reserve “fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments;” and “promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of
Moreover, the historically low level of interest rates may have been due, in part, to large accumulations of savings in some emerging market economies, which acted to depress interest rates globally (Bernanke 2005). Others point to the growth of the market for mortgage-backed securities as contributing to the increase in borrowing. Historically, it was difficult for borrowers to obtain mortgages if they were perceived as a poor credit risk, perhaps because of a below-average credit history or the inability to provide a large down payment. But during the early and mid-2000s high-risk mortgages were offered by lenders who repackaged these loans into
With the recent complicated economic financial environments, there may be some abnormal relationships comparing with the theories. We cannot examine them in the project. 3.
This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and