The Global Financial Crisis and Its Impact

1820 Words Jul 14th, 2018 8 Pages
1.0 The Global Financial Crisis and Its Impact

The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In October 2008, the collapse of the major financial institutions and the crash of stock markets marked the peak of this global economic slowdown (Euromonitor International, 2008).

Although the origin of the GFC might have been the housing and financial crisis in the US, it affected both developed and
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Moreover, if the interest rate maintains its position, the output would decrease even further (Chhabra, 2009).

3.2 Unconventional Monetary Policy
Despite that many countries had reduced their interest rate to the lowest possible, a number of unconventional monetary policy have also been applied to face the challenges of the GFC. Quantitative easing and credit easing are the tools of unconventional monetary policy (Ashworth, 2013).

Quantitative Easing
Under conventional monetary policy, central banks try to boost economies indirectly through cutting interest rates. Quantitative easing occurs when an interest rate has reached its lowest, the central bank decides to increase the size of its reservation to purchase securities from private and public sectors. It forced the interest rate to stay downward and thereby the prices stay high. For the purposes of increase financial market’s liquidity and generate addition loans, central banks also pumping money directly into the market under quantitative easing policy (Murray, 2009). The Bank of Japan first applied to the theory due to a constant deflation in the economy in the beginning of the 21th century (“What is Quantitative Easing”, 2013).

The quantitative easing of the US began in the late 2008, with the announcement that government would purchase a total value of $600 billion of agency debt from the Government Sponsored
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