To What Extent Was The Loose Monetary Policy Used By Central Banks? Essay

1809 WordsSep 12, 20168 Pages
In 2007 the world witnessed an economic downturn so devastating to the global economy that it has been claimed to rival the Great Depression. The US stock market plummeted, the Dow Jones Industrial Average (DJIA) dipping below over 50% after its peak in October 2007, and reached a low of 6600 points by March 2009 . In England, Northern Rock, one of their largest banks, suffered a bank run. This was the first time in over 100 years a bank in England had suffered from a run, and because Lloyd’s bank denied them a buyout they had to be nationalized. If the world’s economy was shaken this much, a large number of significant mistakes must have occurred. The most significant of these mistakes was the loose monetary policy used by central banks. An imbalance of international money distribution and a housing bubble of the brink of bursting were the other heavy problems that eventually dragged the economy down. The period leading up to the 2007 recession was called “The Great Moderaton” because it had many years of low rates of inflation. During this time the real rate of interest, calculated by subtracting the rate of inflation from the nominal rate of interest, was said to have been negative for nearly 40% of the decade following the dot-com crash . A study by John B Taylor showed that the growth rate of the real federal funds rate from the years of 2001 to 2007 should have been rising at a steady rate of about one percent per year. However, because the Federal Reserve was
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