AFFECT OF MONETARY POLICY IN THE U.S ECONOMY

AFFECT OF MONETARY POLICY IN THE U.S ECONOMY

Affect of monetary policy in the U.S Economy

Introduction

When analyzing the factors that determine the functioning of the economy of a country, we often focus on specific aspects such as the level of investment from abroad, transfers, employment generated by industries, the behavior of the regime and the level prices, or the economic policy pursued by the Government.

Monetary policy referred to in handling the amount of money given by the monetary authorities of a country. Generally, countries assign this responsibility centrally Central Bank. In addition, to conduct a prudent monetary policy, the bank has essentially three key instruments. These are: (1) open market operations, to be able to buy or sell securities and certificates, (2) the discount rate, the power to grant loans at lower interest, the Government or multiple banks, and (3) the so-called legal reserve requirement, the banks can subtract a percentage of their liabilities for stabilization. Thus, monetary policy instruments affecting the national economy through their effect on interest rates. (Glenn, 2007)

Factors

Monetary Policy and the Impact on Us Economy

The macroeconomic policy response to this recession was unprecedented in its size and scope. Monetary policy in 2008, under Chairman Bernanke, was the most expansionary since World War II (WWII). The Fed's emphasis remained on the stability of the banking sector and to a lesser extent on inflationary concerns as total spending in the economy declined. As with Japan during the 1990s, concern was express over the appearance of deflation further reducing Fed worries over inflation. (Bordo, 1993)

The Fed even allowed short-term borrowing by financial institutions that were able to use some higher grade MBS as collateral and finally agreed to purchase some MBS itself. All through 2008, the Fed kept creating new auctions and programs of providing credit to the economy. The Fed also pursued traditional easy monetary programs. At the end of 2007, the Fed funds rate was 4.25%. By the end of 2008, it was 0% (officially a range of 0% to 0.25%).

The immediate question this zero-interest rate policy posed was, had the United States run out of monetary policy options just as the NBER announced a recession had started in December 2007? Certainly fiscal policy could be use to stimulate spending, but had monetary policy run aground?

While the Fed was lowering the nominal fed funds rate to zero, it simultaneously pursued a program of “quantitative” monetary ease. The Fed accomplished this in two ways. The first was continuation of traditional monetary expansion. The monetary base doubled in 2008, increasing from $855 billion in December 2007 to over $1,728 billion by December 2008. This expansion was not need to lower the fed funds rate to zero; rather, its aim was to help recapitalize the U.S. banking system. Inflationary concerns put on hold as the Fed kept adding to bank reserves. For the banking sector, this dramatically increased the bank holdings of excess reserves as the Fed kept adding liquidity to the ...