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The US monetary performance prior to the 2008 crisis

  • Li, Kui-Wai

This article uses a Structural Vector Autoregressive (SVAR) approach to study the different shocks to the monetary performance in the two decades of the US economy prior to the 2008 financial crisis. By using the Federal Fund Rate as a measure of change in the monetary policy, this study shows that interest rate expectation is informative about the future movement of Federal Fund Rate and the anticipated monetary policy should be one of the crucial reasons in causing monetary and financial deterioration in the US economy. This article discusses a possible conjecture of a low interest rate trap when a persistent and prolonged low interest rate regime led to financial instability.

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File URL: https://mpra.ub.uni-muenchen.de/41036/1/MPRA_paper_41036.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41036.

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Date of creation: 2012
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Publication status: Published in Applied Economics 24.45(2013): pp. 3449-3460
Handle: RePEc:pra:mprapa:41036
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  1. Kaushik Mitra & James Bullard, 2004. "Determinacy, Learnability, and Monetary Policy Inertia," Royal Holloway, University of London: Discussion Papers in Economics 04/14, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  2. Marcus Miller & Paul Weller & Lei Zhang, 2002. "Moral Hazard and the US Stock Market: Analysing the "Greenspan Put"," Economic Journal, Royal Economic Society, vol. 112(478), pages C171-C186, March.
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  4. Solnik, Bruno, 1987. " Using Financial Prices to Test Exchange Rate Models: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 141-49, March.
  5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  6. Modigliani, Franco, 1977. "The Monetarist Controversy or, Should We Forsake Stabilization Policies?," American Economic Review, American Economic Association, vol. 67(2), pages 1-19, March.
  7. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
  8. Kenneth French & Martin Baily & John Campbell & John Cochrane & Douglas Diamond & Darrell Duffie & Anil Kashyap & Frederic Mishkin & Raghuram Rajan & David Scharfstein & Robert Shiller & Hyun Song Shi, 2010. "The Squam Lake Report: Fixing the Financial System," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(3), pages 8-21.
  9. Douglas Wong & Kui-Wai Li, 2010. "Comparing the performance of relative stock return differential and real exchange rate in two financial crises," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 137-150.
  10. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  11. Stephen G. Cecchetti, 1996. "Practical issues in monetary policy targeting," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-15.
  12. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 231-272, April.
  13. Yash P. Mehra & Brian D. Minton, 2007. "A Taylor rule and the Greenspan era," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 229-250.
  14. Ehrmann, Michael & Fratzscher, Marcel, 2003. "Equal size, equal role? Interest rate interdependence between the Euro area and the United States," CFS Working Paper Series 2003/46, Center for Financial Studies (CFS).
  15. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  16. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  17. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  18. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  19. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September.
  20. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
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  22. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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