Monetary Policy Responses by Central Banks During the Early Part of the Past Decade - Essay Example

To assign blame to the monetary policy of the Fed alone would be to exaggerate its role in the present global financial crisis as the issues of regulation and supervision of “exotic” financial products were one contributing factors as well.

However, there is a consensual view that is increasingly being shared by many that at the heart of the reasons for the global imbalances lies the fact that the Fed kept interest rates “too low for too long” (Taylor,2008,14). This line of thought holds that by keeping the interest rates too low, the Fed encouraged the “real rate of return” in the US T-Bills or Treasuries to increase leading to the rest of the world financing the yawning and steadily increasing current account deficit of the US.

Further, the fact that these countries (led by Japan and China) were exporting huge amounts of goods and services gave them an incentive to “recycle” their dollar surpluses back into the US economy. Hence, it can be said that though the monetary policy of the Fed was aimed primarily at a domestic audience, due to the integrated and interconnected nature of the global economy indirectly contributed to the ongoing global financial crisis (BOE, 2010). It should be noted that the overly loose global monetary policy may have contributed to the weakening of the anchor on which “price stability” rested leading to excessive risk-taking and unleashing a global wave of euphoria contributing to the speculative tendencies in the financial sector.

And this was a global phenomenon as well as central banks all over the world took their cue from the Fed and pursued similar policies which had a cascading effect on the global economy in so far as the lethal combination of excessive liquidity and a lax regulatory structure combined to produce the global financial crises with which the world is even now struggling to cope with (Federal Reserve, 2010).