Monetary Policy in a Zero-Interest-Rate Economy with Reference to the Current Financial Crises - Example

Monetary policy in a zero-interest-rate economy with reference to the current financial crises In 2008, several important indicators of economic downturn suggested an economic recession. These incorporated high oil prices, which led to severe high food prices due to the tremendously loose monetary policies and low interest rates of the U.S. Federal Reserve, in addition to using food yield products such as corn ethanol and bio-diesel as an substitute to petroleum and global price increases; a considerable credit catastrophe leading to the severe bankruptcy of big and well established asset banks over and above commercial banks in diverse nations around the world which resulted in increased unemployment and signs of simultaneous economic downturns in major economies of the world, a global depression. (Robert, 2003) Colour scheme:      Countries in recession as of December 2008      Severely affected countries In December 2008, the NBER (National Bureau of Economic Research) affirmed that the United States had been in depression since December 2007. Since October 2008 a global financial crisis led to the bankruptcy of many financial institutions in the USA and European countries, threatening the global financial system. Global problems and trends The 2000s decade saw a possessions boom, in which the prices of principal possessions rose again after the late-twentieth century supplies recession of 1980-2000. But the prices of many wares, notably oil and food, got so high to cause genuine financial damage, threatening stagflation and a turnaround of globalization in 2008. (Robert, 2003) Oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year in January 2008. Oil peaked at $147.30 a barrel and a gallon of gasoline was more than $4 across most of the U.S.A in July. These elevated prices caused a spectacular drop in demand and prices fell below $35 a barrel at the end of 2008. The foodstuff and fuel crisis were being discussed at the 34th G8 summit in July. Sulphuric acid, that is an important chemical commodity used in processes such as steel processing, copper production and bio-ethanol production, increased in price 3.5-fold in less than one year even as producers of sodium hydroxide have declared force maker due to flooding, precipitating likewise steep price boost. The prices of most commodities fell spectacularly on expectations of diminished demand in a world recession in the second half of 2008. (Laurence, 2003) Medium term crude oil prices In Japan, exports declined for the first time in about five years falling by 1.7 percent in June. Exports to the United States and European Union fell 15.4 percent and 11.2 percent respectively. There was decline in exports and rise in imports cut Japan's trade surplus $1.28 billion a decline of ninety percent from the last year. This was later revised to a decline of 0.7 percent. Japanese exports grew 0.3 percent in August of 2008 compared to a year before down from 8 percent the previous month. Exports to the U.S. fell 21.8 percent, the biggest decline on record, and exports to Europe fell 3.5 percent. Two Japanese banks appeared on the list of major Lehman creditors. On November 17th, the Japanese Economy Minister announced that the nation was officially in a recession. (Laurence, 2003) The economy of U.S.A entered a zero interest rate, the mobilization readiness to support the economy This is the first time in the history of the United States that "zero interest rate policy" is introduced in the transition. (Japan's current interest rate is 0.3 percent; the U.S. will exceed the interest rates. Japanese and U.S. interest rates since February reversed in 1993, is about 16 years after the events) The U.S. consumer price index, ratio increases 1.7% the previous month. CPI in October, the ratio increased 1.0% decline in the previous month to record, the biggest decline since the statistic was started November, the record is significantly modified.▲ 1.7% month-over-month rate of decline continues for one year, the annual decline in the ▲ 13.5%. (Lavan, 2002) (The U.S. producer price index has much greater volatility in July, August, compared with the same month a year earlier, close to double-digit inflation rate was slightly less than three months, momentum is likely to be negative) (Inflation measures for the economic measures) Too high fluctuations in price and now, ‘deflation’ are an increasing concern. Japan has started on zero interest rate in fresh attempt to revive economy. If temporary interest rates fall on the way to zero, it may be essential for the Federation to change how it conducts monetary policy. There is need to examine why conventional policy loses its efficiency at very low interest rates, and appraisal some of the substitute policy tools that are accessible. It is being hoped that this whole discussion will prove to be academic and the economy’s ordinary pliability, together with the easing has already undertaken, will be enough to get service and output growing over. (Tim, Jonathan, 2003) Open-Market Operations Generally, there are attacks as there is weakness in the economy by conducting expansionary open market operations. In a characteristic open-market operation, the Federation has purchased Treasury bills from bond traders in the New York securities market. The outcome is to boost liquidity in the economy and cash and bank funds rise as the number of Treasury bills held by the public fall, and to lesser short-term interest rates. Lesser interest rates give confidence to the consumption and asset, and better liquidity provides the means to economics the latest expenditures. (Tim, Jonathan, 2003) Conclusion It is seen that open-market purchases of bills of assets and the federation’s typical method for motivating the financial system over the past forty years. It has become ineffective as short-term interest rates come close to zero. By means of reserves bill rates so near zero, there will be need to be open to substitutes to typical policy and situate ready to dynamically pursue them if the financial system remains weak. In the occasion it must act unaccompanied, the best policy option is most likely open-market purchases of longer-term government bonds. Hard work to control longer-term treasuries is not extraordinary; they were moderately common previously. But that’s not to say that reorienting the policy would be problem-free and there are good reasons why USA aims its efforts on the small end of the capitulate curve. If customary policy options are worn out, there will be by no means empty. But the arrows that linger are less recognizable and not fairly as straight as the ones that have previously been ablaze. Bibliography: M.Robert, Japan's Economic Recovery: Commercial Policy, Monetary Policy, and Corporate Governance, Edward Elgar Publishing, 2003 S.Laurence, Automatic Fiscal Policies to Combat Recessions, M.E. Sharpe, 2003 M.Lavan, Monetary Transmission in Diverse Economies, Cambridge University Press, 2002 C.Tim, O.Jonathan, Japan's Lost Decade: Policies for Economic Revival, International Monetary Fund, 2003 Read More