GLOBAL FINANCIAL CRISIS

Tools of Monetary Policy

Tools of Monetary Policy

Introduction

The world has witnessed a worst financial crisis which affected many countries, government of countries across the world, corporations and the common man. The global financial crisis led to bankruptcy, unemployment and higher commodity prices. All of these factors are interrelated as the bankruptcy of corporation's results in closure of many corporations which in turn result in unemployment. When the corporation witness losses and become fail to reduce the cost or to manage the sales they prefer to increase the prices of the goods and services that they offer. These are not the only factor which contributes towards the northward movement of prices as there are many more factors which contribute in it. The government of respective countries which witnessed higher prices takes different measure to control the higher prices or inflation. It is a fact that the no government can control soaring prices and higher inflation directly because of its nature. When the prices of commonly used products or services are higher in the country, it is not practically possible for the government to compel the producers to sell products at lower prices (Mishkin, 2009, pp. 25). This report will focus on the tools of monetary policy which help the nations in stabilizing the prices. The report will highlight that how the monetary policy contributed towards controlling inflation in the wake of global financial crisis.

Discussion

Interest Rate

The monetary policy has contributed a lot in stabilizing the prices during financial crisis. The manipulation of interest rate for the economy is a crucial part of the monetary policy. If the interest rates are lower than there will be less cost of borrowing money which will provide impetus for more money to be borrowed. In this case the people will borrow more money for acquiring assets like houses and cars and for general spending. This will increase the spending pattern which means that there is higher demand for the goods and services. In such situation, the change in monetary policy will help in decreasing the prices or at least stabilizing prices at current level (Hamilton & Wu, 2012, pp. 38).

This is what happened in the global financial crisis. The governments of countries which were affected by the global financial crisis and the respective authorities of European Union have taken certain initiatives in term of monetary policy to control the soaring inflation figures. These authorities increased the rate of interest in their countries which in turn increases the cost of capital. The people who were ready to borrow at lower rate become reluctant in borrowing at higher rate of interest. Therefore, the demand level of goods and services comes down. There is a big need of mentioning that the impact of changing interest rate will not be immediate but it will take time to actually impact the inflation (Stein, 2011, pp. 49).

Open Market Operation

There is another tool of monetary policy which is Open Market Operation. Under this tool, the federal or bank of ...