...current US monetary policy of very low official interest rates, and the likely consequences of that policy. In times of Financial Crisis, where markets fail to deliver solutions, it is expected that government intervention in the form of monetary and fiscal stimulus will be utilised as a solution. However, given the severity of the current crisis policymakers face tough new economic challenges that are reminiscent of the 1930’s Great Depression. One particular form of stimulus has come from the US Federal Reserve’s decision to maintain low interest rates. This paper aims to analyse the justifications for such low interest rates and discuss the likely consequences of such a policy stance. With the onset of the Global Financial Crisis (GFC) in 2007, the US Federal Reserve (the Fed) has shifted towards a policy of monetary easing in an attempt to quash fears of a prolonged recession. Since September 2007 , official rates have fallen from 5.25% to 0.25% in December 2008 (TradingEconomics.com, 2009), with a clear pledge to keep rates low for as long as necessary (FOMC, 2009). In recent history, US monetary policy has been focused (but not exclusive) on maintaining a target inflation rate of 1-2% over the course of a business cycle (Bernanke, 2003). Low interest rates would imply inflationary pressure due to increased demand for money. However, the Fed has justified the low rates as necessary to fight the recession, given the fact that the alternate monetary policy objectives...
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... it is time for the Fed to start to return the monetary policy back to normal. In September of 2012, Fed chair Ben Bernanke announced an indefinite program of $40bn per month in asset purchases. Some feared this quantitative easing would never come to an end. However, under new chair, the Fed plans to stop quantitative easing. The Fed’s balance sheet is around 4.4 trillion, up from 900 billion before the crisis; this was caused by the bond purchasing . At this point in the economic recovery, the growth and job creation has some momentum, which can be expected to continue without this stimulus. The issue with this monetary policy is that it may in fact be creating asset bubbles similar to those that contributed to the financial crisis. Investors search for returns, and the Fed's super low interest rate policy may have caused them to become so crazy making investmenst...
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...CRISIS * DIFFERENCE BETWEEN US/ EUROPE AND INDIA * RBI’S POLICY, RESPONSE AND IMPACT * LESSONS FROM THE CRISIS * MEDIUM- TERM ISSUES AND CHALLENGES GLOBAL FINANCIAL CRISIS * Proximate causes & Fundamental causes * Current account balance * US monetary policy Policy 1: * Volatility in monetary policy in advanced economies. * Large volatility in capital flows to EMEs. Policy 2 : * US Monetary policy too loose during 2002-04; aggregate demand exceeded output; large current a/c deficit; mirrored in large surpluses in China and elsewhere. Policy 3 : * Large Fed cuts in 2007: strong boost to oil, other commodity and asset prices * Capital Flows to Emerging Market Economies * Worsening Global Economic Outlook DIFFERENCES BETWEEN FINANCIAL CRISIS IN US/EUROPE AND INDIA * What has not happened in India : * No bank losses threatening capital * No bank credit crunch * No mistrust between banks * Our Problems : * Reduction in capital flows * Stock markets * Monetary and liquidity impact * Fiscal stress * Oil, Fertiliser, Food subsidies * Pay Commission, Debt waiver, NRE * GFD/GDP ratio: 5.5-6.0% * India’s Approach to Managing Financial Stability: * Current account: Full, but gradual opening up * Capital account and financial sector RBI’S POLICY, RESPONSE AND IMPACT * Expanding...
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...Expantionary monetary Policy The Federal Reserve adopts the monetary policies to boost the economy, and aid the country’s currency to rotate from the investors to the financial institutions and to borrowers. In the Expansionary Monetary Policy, this is achieved by the purchase securities on the open market, known as Open Market Operations, by lowering the federal discount rate, and lowering the Reserve requirements. This has a great effect, not only in the economy, but also on the banks and businesses operations. In my opinion this is a great tool that makes our banking system more competitive in the international market. For instance the use of any of the tools mentioned before affects directly the interest rates charged to borrowers and the price of bonds. Moreover if the Reserve requirements are lowered, banks will have extra money that they can invest either nationally or internationally. The government stimulates bond prices by buying short-term US Treasury securities from institutions such as banks and brokerage houses. As a result, the demand for the securities will increase, bond prices will be higher and the interest rates lower. As mentioned before such measures can have a competitive advantage for the United States. For example, when interest rates are lowered US banks can lend money at lower interest than other nations; and nations seeking for extra capital would most likely turn to the US banks for those funds. Furthermore, investors will start trusting the banking...
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...Preliminary draft: please do not quote or cite India’s Trilemma: Financial Liberalization, Exchange Rates and Monetary Policy∗ August 22, 2010 Michael M. Hutchison Department of Economics University of California Santa Cruz, CA 95064 USA Rajeswari Sengupta Department of Economics University of California Santa Cruz, CA 95064 USA Nirvikar Singh Department of Economics University of California Santa Cruz, CA 95064 Abstract A key challenge for macroeconomic policy in open economies is how to simultaneously manage exchange rates, interest rates and capital account openness—the trilemma. This paper calculates a trilemma index for India and investigates its evolution over time. We find that financial integration has increased markedly after the mid-2000s, with corresponding limitations on monetary independence and exchange rate stability. This tradeoff has been mitigated, however, with the rise of international reserves as a partially independent instrument of macroeconomic policy. In addition, we confirm that the weighted sum of the three indexes adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two. Finally, we consider the implications of changes in the trilemma index for macroeconomic outcomes. We find some evidence that greater financial integration and corresponding loss of monetary autonomy and exchange rate stability has influenced inflation and inflation volatility, though not...
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...who took speculative positions via derivatives on mortgages, but didn't own the underlying bonds. The shock happened because when the housing market went south, the people who shorted housing were due to be paid a lot, and the banks were overexposed to cover those losses. The Fed Reserve's role was to utilize monetary policy to ensure liquidity in this credit crisis, when banks were cash strapped. Thus, they lowered interest rates. We also saw capital flows into the US economy in the form of sovereign wealth funds helping to infuse capital into banks like Merrill Lynch and Citi. Furthermore, one should be cautiously optimistic about the current state of the economy. The cautious optimism is evident in the Big Three indicators of the US economy: GDP, Unemployment, and Inflation. As for GDP growth, since 2009, growth has been hovering between around 0 and 5%. However, when considering the changes in government expenditures, whenever the government’s spending decreased, real private investment and residential investments decreased as well. As for unemployment, although the Unemployment rate has been trending downward, and now averaging 5% for the first time since 2008, the US Economy demonstrates that the changes in nonfarm employment has been drastically decreasing. So unemployment numbers look better because people aren’t being counted in the labor force. Also, inflation has remained around 2% for the past few years, but concerns are around the real interest rate falling negative...
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...IDB-WP-211 Macroeconomic Effects of China’s Fiscal Stimulus Pietro Cova Massimiliano Pisani Alessandro Rebucci September 2010 Inter-American Development Bank Department of Research and Chief Economist Macroeconomic Effects of China’s Fiscal Stimulus Pietro Cova* Massimiliano Pisani* Alessandro Rebucci** * Bank of Italy ** Inter-American Development Bank Inter-American Development Bank 2010 Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library Cova, Pietro. Macroeconomic effects of China’s fiscal stimulus / Pietro Cova, Massimiliano Pisani, Alessandro Rebucci. p. cm. (IDB working paper series ; 211) Includes bibliographical references. 1. Fiscal Policy—Economic aspects—China. 2. Economic Policy—China. I. Pisani, Massimiliano. II. Rebucci, Alessandro. III. Inter-American Development Bank. Research Dept. IV. Title. V. Series. © Inter-American Development Bank, 2010 www.iadb.org Documents published in the IDB working paper series are of the highest academic and editorial quality. All have been peer reviewed by recognized experts in their field and professionally edited. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This paper may be freely reproduced provided credit is given to the Inter-American Development...
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...the US relating to the economy is worrisome. The unemployment rate was reported at 9.1 in August 2011, From 1948 till 2010 the US unemployment rate has averaged 5.70 percent. The fiscal policy of increasing expenditure on infrastructure and providing a stimulus package would be appropriate. The US inflation rate was reported at 3.8 percent, this compares with the past average rate of 3.38 percent. This moderate rate of inflation may actually be helpful to businesses. The US GDP growth rate expanded to 1.3 percent in the second quarter of 2011.Between 1947 and 2011 the average rate has been 3.28. To stimulate the growth rate the government must use an expansionary fiscal policy and should use the monetary policy to increase the liquidity in the system. The Federal Reserve should reduce the interest rates so that more funds are available to businesses for expansion of operations. To stimulate the GDP growth rate and to reduce the unemployment rate the government has fiscal expansionary tools. The expansionary policy means that the government expenditure is greater than the government tax revenues. The tools of expansionary policy with the US government are reducing taxation, printing more money, borrowing money from US citizens/ from abroad, using up fiscal reserves, and the sale of fixed assets of the government (1). A combination of these tools must be used to stimulate the US economy. The monetary policy of the US is...
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...:-Done by Sunil Kumar and Ajeet verma Indian economy before us recession India had been growing robustly at an annual average rate of 8.8 per cent for the past five years (2003-04 to 2007-08). This was higher than the potential growth rate of output as estimated by the IMF. The strong Indian growth story, based on its structural strengths of a young population, skilled manpower, rising savings and investment rates, large unfulfilled domestic demand and globally competitive firms attracted significant investor attention in recent years. Recent high rates of economic growth have been the result of high levels of investment, rise in productivity supported by technological up-gradation and greater integration with global flows of trade, finance and technology. The challenge is to sustain these high growth rates while also preventing an unacceptable rise in income and spatial inequities and also eliminating absolute poverty in a given time frame. The answer to this challenge is in raising India’s potential rate of output growth by removing the binding constraints. We have also estimated the potential growth rate for India during the last decade based on HP filter technique (Hodrick and Prescott, 1997) and found that in the last three years, India had been growing above its potential growth rate. Figure 6: Potential GDP Growth and Output Gap (1997-08 to 2007-08) Note: Based on HP filter technique as proposed by Hodrick and Prescott (1997). Fears of over-heating...
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...salient feature of world history today. The Chinese leader Deng Xiaoping who initiated and directed economic reform from a planned to a market economy understood the importance of globalization and adopted what he called an “open-door policy” as an essential part of the reform program. The term globalization refers to the crossing of national boundaries. It means the flow of goods, capital, information/technology and people across national borders. China practiced globalization in the Han dynasty (206BC-220AD) when trade took place between the Han Chinese and neighboring people in the North-west through the Silk Route. During the Tang dynasty (618-901) trade flourished and the Silk Route expanded as Chinese traded with the Romans. However, in the Qing Dynasty and in the period of the PRC up to Deng Xiaoping’s open-door policy China tried to close its doors and resisted globalization. I will survey the accomplishments of globalization for China’s economic development and clarify some controversial issues concerning globalization. 1. Foreign Trade. First consider foreign trade or the flow of goods across national borders. Since 1978 China has encouraged free trade and abolished trade restrictions step by step. The government has changed its policy from the administration of foreign trade by the Ministry of Foreign Trade, to...
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...Federal Reserve applies monetary policies towards retaining the economic balances. The intent of money, whether it is currencies, credit cards, demand deposits, and revenues of exchange in which we use to purchase merchandises. It is an instrument received in exchange for profit and is an acknowledged statistic that all nationalities agree to take it. Currency includes three roles in the financial system: 1. Medium of Exchange – a worldwide utensil that consents of consumers as well as traders to money trade in a transaction designed for services and goods. 2. Unit of Account – Money also functions by means of a unit of account, providing a frequent quantity of the value of products and services exchanged. Calculating the value or price of a good, in terms of money, enables both the merchant and the buyer to render decisions about how much of the good to supply and how much of the good to purchase. 3. Store of Value – product, exchange, forms of resources that are tradable and stored for imminent use. It is a basic module of the monetary system as it allows exchange to transpire with substances that have inherited profit. An example of store of value is currency. If the worth of currency becomes irregular, such as in occasions of hyperinflations, shareholders and consumers will shift to alternative stores of value, such as real estate, precious stones, silver and gold. The Federal Reserve achieves a monetar system by instigating monetary policies. The Federal Reserve...
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...Chinese policies to tackle inflation Abstract: India and china the two Asian giant, have shown economic growth in last few decades. The expansion of the economy brought high inflation in both countries. Inflation impacts all types of the consumers while rich or poor, it will become a real problem if the countries didn’t adopt policies to decrease the inflation rate. India and china have a very fast economic growth with fast population. The government and the central bank have to work beside to curb the inflation using two main policies are monetary policy and fiscal policy. In the monetary policy the central bank has to manage the many supply in the market and also control and decline the inflation, in terms of fiscal policy the government try to see the tax level to impact in the inflation rate. Monetary policy has more effect than fiscal policy, but also there are challenges implementations of the policies. Argument 1(monetary policy) India has faced a hyperinflation in years 2009 to 2011 to unprecedented level. The inflation in India affects the saving of the Indian household which decreased the value of saving in that nation. The monetary authorities are trying to impact the money supply directly without creating deformation in the economy by changes CRR (cash reserve ratio), repo and reverse repo rate. The main objective is to maintain price stability. The RBI (reserve bank of India) trying to control the money supply by using which called contractionary monetary policy...
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...Economic Forecast 4 2.2 Changes in Savings 4 2.2.1 Economic Forecast 4 2.3 Changes in Investment 5 2.3.1 Economic Forecast 5 2.4 Changes in Unemployment Rates 6 2.4.1 Economic Forecast 6 2.5 Changes in Real Interest Rates 7 2.5.1 Economic Forecast 7 3.0 How Government Policies Can Influence Economic Growth 8 4.0 Influence of Monetary Policy 8 5.0 Influence of Trade Deficits or Surpluses 9 6.0 The market for loanable funds and the market for foreign-currency exchange 9 7.0 Recommendation based on the Achievement of the Strategic Plan 10 8.0 Conclusion 11 ALF Money and the Prices in the Long Run and Open Economies 1.0 Introduction (Creasey, Rahman, & Smith, 2012), defines economic growth as the rise of the monetary value of the goods and services produced by a country or an economy over a given period. Economic growth is simply the percentage change (increase or decrease) in the real GDP (gross domestic product) (Ahmad, 2013). "The economy of the United States is among the top largest economies in the world though it is facing stiff competition from other economies such as China," (Orhangazi, 2008). An analysis of the US economy reveals that it requires an aggressive growth plan which requires investment in equipment and facilities, increase in labor and productivity over the half decade. 2.0 History of Economic Changes and comparing it to Forecast for the next Five Years 2.1 Changes in GDP GDP...
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...2014 GDP Growth Rate During the first quarter of 2014, the United States GDP (Gross Domestic Product) Growth Rate grew only 0.1%. This type of growth makes our economy look worse than it really is performing. There were many different factors that helped hold back the economic growth. One major factor was weather. Weather actually decreased consumption of housing and goods, although it did boost spending on utilities. During 2013, exports to China and business investments on aircraft were very high. A partial pullback in these areas also contributed to an abysmal GDP Growth Rate. The stockpiling of inventories dropped by the extensively as they were moving at unsustainable rates at the end of 2013. U.S. GDP only grew in 2013 at a rate of 1.9%. There are many factors that will only allow slow growth in the GDP. These factors or forces are the following: • Washington’s attempt to cut government spending. • High structural unemployment. • Personal consumption is at 70% of the current GDP. There are a few forces that are worrying analysts about the growth of the United States GDP growth rate. These forces while they will only happen in certain scenarios will also weigh on the GDP growth rate. Below are the forces that and what their effects are on the GDP growth rate. A cutback on the quantitative easing by the Federal Reserve is huge fear of analysts. The cutback will result in higher interest rates on loans and mortgages making getting a loan for individuals...
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... 3 1. Introduction 4 2.1. Expansionary Monetary Policy 5 2.2. Contractionary Monetary Policy 6 2. Overview of the United States Monetary Policy 7 2.1 Overview of Recent United States Monetary Policy 8 3. Recent (2011) Direction of Monetary Policy 10 4. Market Reaction to Monetary Policy 12 5. Conclusion 15 6. Reference List 16 1.0 Introduction In macroeconomics, monetary policy is an importance tool to Central Bank and is a policy set by the members of Central Bank. It is an economic strategy chosen by government that authorizes Central Bank to regulate and influence the economic activity by controlling the monetary base flow into national economy. The goals of monetary policy are to promote growth of the economy, stability of prices and reduce unemployment rate. Monetary policy can be classified into two categories, namely expansionary monetary policy and contractionary monetary policy. Although, the objective for the two policies is the same, they adopt different approaches in reaching this objective. Expansionary monetary policy is used when a country is facing a recession in the economy business cycle, whereby it increases the money supply in economy system to meet its objectives. In contrast, where there is a peak in the economy business cycle, central bank will use contractionary monetary policy to reduce the money supply in economy system so as to retard the inflation...
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