The Macroeconomics of Financial Crises: How Risk Premiums and Liquidity Traps Affect Policy Options Course and code Date Part 1 The Emergence of Large and Volatile Risk-Premiums during the Financial Crisis Mostly, business cycle models are affected by the unprecedented large and perhaps risk-premiums, which come during financial crisis (Fontana & Setterfield, 2009, p…
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Due to this problem, the economists urge business practitioners in different countries to adopt new paradigms. i) Interest Rate Data of the United States, Canada and United Kingdom United States In the United States, the interest rate was reported to be approximately 0.25 percent beginning March 2009 (Trading Economics (a), 2012, p. 1). Fortunately, the country has put several fiscal policy frameworks, which have enabled it to maintain the rate fairly the same till January 2012 (Trading Economics (a), 2012, p. 1). At this rate, doing business in the country is relatively cheaper compared to other countries experiencing exorbitant interest rates as shown. Source: http://www.tradingeconomics.com/united-states/interest-rate As presented in the chart, the authorities mandated to fix the interest rates are the Federal Open Market Committee (FOMC) and the Federal Reserve’s Board of Governors (Board) (Trading Economics (a), 2012, p. 1). In operation, the Board receives recommendations the Regional Federal Reserve Banks (RFRB), after which it carefully reviews and changes the discount rates appropriately (Trading Economics (a), 2012, p. 1). ...
d-states/interest-rate Canada In Canada, as at January 2012, the situation was different and the interest rate stands at 1.0 percent (Trading Economics (b), 2012, p. 1). Here, the authorities mandated to fix the interest rates is the Governing Council of Bank of Canada (BOC) (Trading Economics (b), 2012, p. 1). Therefore, the banks rate is the official country’s interest rate. In choosing the policy option(s), the country has always relied on its interest rates and the risk premiums, comparing them to the ones that other countries adopt (Trading Economics (b), 2012, p. 1). Indeed, this is critical in fixing the rates, a move that could make the country arrive at workable figures, which encourage the local and international investors to start businesses. In addition, the entrepreneurs can obtain loan from the commercial banks, at a lower rate to expand their business (Kindleberger & Aliber, 2011, p. 105). Ideally, this favours the investors and makes the business environment to be competitive. Therefore, the smart entrepreneur would eventually carries the day and strengthen his/her business. Source: http://www.tradingeconomics.com/canada/interest-rate United Kingdom In the United Kingdom, as at January 2012, the situation was different and the interest rate stood at 0.5 percent (Trading Economics (c), 2012, p. 1). Here, the independent authority mandated to fix the interest rates is the Monetary Policy Committee (MCP) (Trading Economics (c), 2012, p. 1). At the same time, the Bank of England oversees the rate that is the MPC fixes and may agree to adopt or reject the proposal (Trading Economics (c), 2012, p. 1). Source: http://www.tradingeconomics.com/united-kingdom/interest-rate ii) The money market risk premiums for each of the 3 countries The risk premiums, which
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