Economics of Money and Banking

Economics of Money and Banking

Question 1

We observe very large and rapid declines in the policy rate (the very short-term rate) in late 2008 and early 2009. Considering the US, the UK, and Japan, did long-term rates fall as much around that time or less or more?

(Source: www.bis.org)

Decline in long term rates at the beginning and mid of June 2012, have halted reserve and central, this fall resulted in a tightening action of policy rates that have been came in place from many emerging and advanced market economies, graph 4.1 shows the trend of long term rates, it took place in many emerging and advanced economies, it includes, United States, United kingdom and Japan, due to this fall in policy rates, advanced economies faced receding inflationary pressure and hampered growth, European central bank cut down its financing rate and declined it to one percent, it has allowed euro area to fall to a level that can close down the deposit facility rate, however on the other hand, advanced economies have continued to cut rates by four hundred basis points. Bank of Japan and Federal Reserve Bank of England amplified existing and identified programmes of large scale asset purchase, which have aimed at lowering down long term interest rates and premia of financial risk. It brought up more general approach in order to bring easing system for bringing additional monetary support (Mishkin 2003).

Central bank of every advance economies has cut down the benchmark and policy rates with certain percentages, Particularly United States, United Kingdom and Japan have cut down the policy rates during 2012, this cut down is depicted in forward curves.

Question 2

When you compare the fall in long-term interest rates to the change in inflation expectations in these same three countries, did the real long-term rate stay the same or rise or fall during that period?

(Source: www.bis.org)

The long term interest rates faced a declined during a period of 2007 to 2012, it was a consequence of large scale asset purchases that have been implemented by central banks during late 2008, and it had a considerable increased during holdings outright, on the other hand this decline was due to the government bonds, it had a significant impact on long term interest rates, England central bank policy have also affected long term interest rates and result in disruption on euro areas transmission of monetary mechanisms (Matthews 2005). It has provided failing implication of funding conditions, whereas rapid increase in bond yields reactivated purchase of government bonds, which was under securities market program (SMP). However in order to analyze the rapidly worsening bank funding conditions in euro area market European central bank conducted refinancing operations, the initiation of refinancing operations widened the range of collateral assets, it halved required reserve ration and accepted in refinancing operations.

Question 3

The BIS Report shows estimates of expected inflation which are based on surveys. Use these estimates and combine them with the actual nominal rates for June 2012 to derive an estimate of ...