Monetary Policy Change and Its Effect on Banks before and after Financial Crisis - Research Proposal Example

Monetary Policy Change and Its Effect on Banks Before and After Financial Crisis Introduction Monetary policy of an economy aims to control the macroeconomic factors of the economy so that stability can be ensured and sustainable economic growth can be ascertained. Depending on current economic situation prevailing within the country as well as in world outside, the government along with the central bank of the country formulates the monetary policy and brings changes according to the requirements. Many economists are of the opinion that the global financial crisis of 2008 was mainly caused by poor governance and faulty monetary policies enforced by the central banks of the major economies. However, when the world economy crashed as a consequence of the severe effect of financial crisis, the policymakers understood the prerequisite for tightening the monetary policy and control the movements of macroeconomic variables. Therefore, the monetary policy has gone through substantial transformations before and after the period of financial crisis. In this paper, research proposal will be constructed on the subject matter of changes in monetary policy of eurozone and the United States during the pre and post crisis period (Cukiermana, 2013). A series of theoretical aspects such as agency theory and moral hazard has significantly contributed to ignite the magnitude of the crisis which in turn forced the central banks and other authorities to alter monetary policies over the period of time. As the subject matter involves considerable scope for research and critical analysis of different economic and financial theories, the topic has been chosen to pursue the project. Literature Review In this segment, literature review will be done on the proposed research article in order to examine key arguments regarding the role of monetary policy in the financial crisis and analyse findings of the researchers in this aspect. According to Claessens, Kose, Laeven and Valencia (2012), the reason behind financial crisis can be attributed to the extensive risk taking behaviour of the commercial banks in big economies such as the United States. A series of deregulation of monetary policy and its lenient approach towards the economy led to originate credit booms and asset price bubbles. Desai (2014) identified that the bubbles in real estate market which is considered to be the main reason for financial crisis, occurred due to adoption of a number of defective monetary policies. Many commercial banks in Spain, Ireland and other western countries were encouraged to grant access to cheap housing loans to the NINJA customer segment (No Income No Job). Such behaviour of the banks resulted in 35% drop in the housing prices in 2007. Hertzberg, Liberti and Paravisini (2011) also shown that during the period the government debt increased by 86% as compared to the pre-crisis period. Eminent economist and Nobel laureate Krugman (2008) highlighted that the failure of monetary policy is reflected during the crisis policy as the cost of credit to households fall in spite of sharp easing of monetary policy. Considering the aftermath of the recession, according to The Guardian (2014), the recession, driven by the financial crisis lasted in US from December 2007 to June 2009 whereas, eurozone witnessed the economic recession since January 2008 to April 2009. Though the tenures were almost same, it has been noticed that the eurozone experienced an extended recession cycle that had preoccupied the economy till third quarter of 2011. Subacchi (2014) proved this myth by showing sharp differences in the unemployment rate between the two economies. During the period of 2011, when the unemployment rate in eurozone was 12.1%, US experienced only 6.7% unemployment rate. Though US is considered to be the epicentre of the financial crisis, transformation of the economic condition in in the economy had been possible by effective management of the monetary policy. In 2008, the short term interest rate was decreased up to zero in 2008 by the Federal Reserve and maintained such interest level for a very long time in order to recover housing market and mortgages which were affected the most. In contrast, considering the case in Europe, as the European Central Bank (ECB) and the European Commission is less accountable for Eurozone residents, tightening of monetary policy could not safeguard the victims of those countries. Moreover, further research of Hertzberg, Liberti and Paravisini (2011) had shown that in Europe, reform measures taken for 27 European Union countries in the post recession period, in terms of reducing the size of government, bargaining power of labour, reducing the government spending on healthcare as well as eliminating protection for unemployment further worsen the situation in Eurozone. Central Aims and Research Questions The central aim of the paper is to address four consecutive issues. First, how infectiveness of the monetary policy of Europe and the United States during the pre-crisis period led the economy to experience such severe economic downturn? Secondly, to what extend prevailing defects in the system and lack of forward-looking ability of the policymakers amplified the effect of the crisis. Thirdly, between the US and Europe, who was affected more severely by the adverse consequences of financial crisis and finally, how these two big economies evolved and stabilised over the period of time through efficient management of macroeconomic variables and other initiatives taken by the monetary authorities such as bailout and quantitative easing. In this context, it should also be discussed that if the monetary policy was a big failure then there was no point of using it for rescuing the economy from the clasp of crisis. Another important aspect in this regard is that some economists argued that the main reason behind easing the monetary policy before the initiation crisis was to achieve an attainable inflation rate in the economy and to establish expansion of business and investment avenues (Taylor, 2009). Argument can be drawn in this regard by raising question that if the objective of monetary policy is to nullify the contractionary pressure then isn’t it justified for the policy makers to formulate a more aggressive monetary policy? Research Methodology Research methodology indicates the technique for collection of data and information for conducting an extensive research and for arriving at a realistic and practical conclusion (Ogden and Goldberg, 2002). Collection of Data: Secondary Research In order to investigate the changes in monetary policy before and after the crisis- driven period and its effect on banking sector, secondary research must be conducted. Such secondary research is based on the researches done on the primary basis. As it is impossible to conduct primary research for collecting evidence on monetary policies worldwide, the best and consistent way is to rely on the data and information collected from primary sources (Denscombe, 2012). Such third party sources can be categorized as information accessed from the publications of various centrals bank of different economies, articles and magazines from the fields of finance and economics, data and reports published and circulated by financial institutions such as International Monetary Fund, World Bank etc. Research Approach: Qualitative Research Methodology Once the data and required information is collected for the purpose of pursuing further research, qualitative data has been adopted. Qualitative research aims to evaluate the intrinsic connotation of the research objective and to analyse the contradictory arguments proposed by different connoisseurs. To be more specific, qualitative research aims to conduct an in-depth study on the materials and information collected and surfaces the pattern of a certain approach (Maxwell, 2012). While conducting qualitative research for analysing monetary policy during the pre and post crisis period, deductive reasoning approach will be adopted that involves studying the existing and fundamental information thoroughly and derive the root cause of the research issue. As qualitative research is not based on any pre-determined hypothesis and not confined to limited available data as in the case of quantitative analysis, this research approach provides more flexibility for carrying out the research. Meta analysis will also be done to arrive at a conclusion based on the numerous existing studies and hypothesis (Creswell, 2013). Research Technique: Historical Research Technique Research technique leads to conduct systematic investigation for answering to the research in a structured manner. For the purpose of conducting research on the financial crisis of 2008 and reaction of the monetary policy, historical technique should be adopted which means using historical data from the period of 2007 to present, articles, theories by eminent policymakers, economists and accordingly arrive at the solutions to the research questions. As the research approach is qualitative, it will be appropriate for the researcher as well to critically analyse the historical data and arrive at the conclusion to the research proposal (Corbin and Strauss, 2007). Research Paradigm: Critical Theory In research epistemology, paradigm shows application of the concepts, patterns and relevant theories and the extent of contribution of such theories into the research result. Researching on the financial crisis, the role of monetary policy and the effect on banking system, research paradigm adopted should be critical. Critical research paradigm inflicts careful study of all the avenues related to the subject matter of the research and provides consequential and logical argument regarding the specific research questions (Popkewitz, 2012). Project Stages and Annual Completion Expectation Taking forward the research in a systematic way will involve definite structure and well-defined stages following which the researcher will proceed so that he can keep a track on the progress of the research and complete the research work within the stipulated time period. Considering the research work on time to time changes in monetary policy during the financial crisis period and ifs influence on the banking sector of Europe and US the researcher must pursue the following project stages. For simplification of calculation, it is considered that the research will take three months of time starting from identification of research area to preparation of final report. In the first month, the researcher will devote his time in indentifying the research area among the wide range of alternatives present to him regarding his subject of specialization. Once the research area is identified, concentration is shifted in preparing research proposal. Preparation of research proposal will reveal the requirements for extraction of relevant secondary data and analysis of such data. Analysis of secondary data will involve considerable time because the researcher will need to collect and assemble all the information regarding the movements of interest rate, inflation, credit cycle and all other macroeconomic variables from the database of European Central Bank and Federal Reserve System for throughout the period of 7 years and analyse accordingly. Hence, this process will also take another one month of time. After collecting the secondary information from the pre-determined sources and analysing it critically, the researcher will start drafting the research paper. Drafting the research paper involves scrutinizing the available and pre-examined articles and data repeteadly. Therefore, it will will take one more month to draft the research paper, proofread it in order to ensure all the points has been covered rigorously and finally, submitting the final report. The project is expected to complete in three months of time. The cumulative timeframe required for the projetc is presented by the gantt chart. Figure 1: Gantt Chart of the Project States Limitations While conducting qualitative secondary research, possibilities are there to encounter multiple difficulties. As the research technique is historical, data and information should be collected from central banks of different countries in order to comprehend the aggregate scenario of the financial of 2008. For the purpose of researching on the monetary policy changes in Eurozone and the United States, data should be collected from the respective central banks. However, it is difficult to access data from European Central Bank and Federal Reserve System without having legal authority to access the database. If relied on any third party data provider, accuracy and authentication of such data is highly deteriorated, degrading the quality of research. In fact, it is a very time consuming process to gather all the information related to monetary policy changes for the long time period ranging from 2006 since when the monetary policy started loosening the economy for encouraging rapid expansion to present. Collecting all the relevant information and collaborating it, is definitely a subject of patience and hard work. Importance of the Proposed Project Though numerous research-works has been conducted on the financial crisis and great recession that had occurred during 2008 and a large number of research papers are available in this regard, further investigation has shown that very few researches has been conducted which shows the transformation of monetary policy since the pre-crisis period to the post crisis period. Evidence of research work that involves comparative analysis of the monetary policies of the two big economies of the world such as Europe and the United States is also extremely difficult to find out. Therefore, it can be inferred that the proposed research holds immense importance in the study of global finance and economics (Senanayake, 2010).   Reference List Claessens, S., Kose, M. A., Laeven, L. and Valencia, F., 2012. Understanding Financial Crises: Causes, Consequences, and Policy Responses. Washington DC: International Monetary Fund. Corbin, J. and Strauss, A., 2007. Basics of Qualitative Research: Techniques and Procedures for Developing Grounded Theory. California: SAGE Publications. Creswell, J. W., 2013. Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. California: SAGE Publications. Cukiermana, A., 2013. Monetary policy and institutions before, during, and after the global financial crisis. Journal of Financial Stability, 9(3), pp. 373–384. Denscombe, M., 2012. Research Proposals: A Practical Guide: A Practical Guide. New York: McGraw-Hill Education. Desai, P., 2014. Financial Crisis, Contagion, and Containment: From Asia to Argentina. New Jersey: Princeton University Press. Hertzberg, A., Liberti, J.M. and Paravisini, D., 2011. Public information and coordination: evidence from a credit registry expansion. Journal of Finance, 66(5), pp. 379–412. Krugman, P. 2008. Depression Economics Returns. [Online] Available at: < http://www.nytimes.com/2008/11/14/opinion/14krugman.html?_r=0> [Accessed 18 March 2015]. Maxwell, J. A., 2012. Qualitative Research Design: An Interactive Approach: An Interactive Approach. California: SAGE Publications. Ogden, T. E. and Goldberg, I. A., 2002. Research Proposals: A Guide to Success. Waltham: Academic Press. Popkewitz, T. H., 2012. Paradigm and Ideology in Educational Research. London: Routledge. Senanayake, N., 2010. Structured Finance and the 2007-2008 Financial Crisis: Causes, Consequences and Implications. Berlin: Verlag GmbH. Subacchi, P., 2014. Coordinating the Next Move: Monetary Policy in the Post-crisis World. The G-20 and Central Banks in the New World of Unconventional Monetary Policy, 1(1), pp. 88-91. Taylor, J. B., 2009. The Financial Crisis and The Policy Responses: An Empirical Analysis Of What Went Wrong. National Bureau of Economic Research, 1(1), pp. 1-30. The Guardian, 2014. Why has Europes economy done worse than the US? [Online] Available at: [Accessed 18 March 2015]. Bibliography Alexander, K. and Dhumale, R., 2012. Research Handbook on International Financial Regulation. Cheltenham: Edward Elgar Publishing. Amano, M., 2012. Money, Capital Formation and Economic Growth: International Comparison with Time Series Analysis. Basingstoke: Palgrave Macmillan. Belke, A. and Polleit, T., 2009. Monetary Economics in Globalised Financial Markets. Berlin: Springer Science & Business Media. Goldstein, I., 2013. Empirical Literature on Financial Crises: Fundamentals vs. Panic. [PDf] Available at: < http://finance.wharton.upenn.edu/~itayg/Files/financialcrisesreview-published.pdf> [Accessed 18 March 2015]. Krathwohl, D. R., 2008. How to Prepare a Research Proposal: Guidelines for Funding and Dissertations in the Social and Behavioral Sciences. New York: Syracuse University Press. Kunt, A. D. and Kaufman, G. G., 2011. The International Financial Crisis: Have the Rules of Finance Changed? 4th ed. Singapore: World Scientific Publishing. Odell, S. J., 2014. U.S. International Monetary Policy: Markets, Power, and Ideas as Sources of Change. Princeton: Princeton University Press. Severov, G. P., 2006. International Finance and Monetary Policy. New York: Nova Publishers. Thompson, J. L. and Buckle, M., 2009. The UK financial system: theory and practice. Manchester: Manchester University Press. World Bank, 2011. The World Bank Groups Response to the Global Economic Crisis: Phase I. Washington DC: World Bank Publications. Read More