MONETARY POLICY AND THE 2007-08 GLOBAL FINANCIAL CRISIS: AN OVERVIEW
This paper analyzes the run up of the financial crisis from monetary policy point of view. After showing
that the Taylor rule closely conforms to policy interest rate setting practices of the Federal Reserve System
(Fed) from 1987 onwards, we use the Taylor rule in order to represent the Fed’s interest rate setting policy.
Utilizing cumulative sum (cusum) and Chow forecast tests we show that starting from the early 2000s the
Fed started to follow a loose monetary policy. We argue that loose monetary policy and the consequent
excess liquidity in the markets, accompanied by easy credit policies and deregulation in the financial
system helped to fledge a housing bubble and hence the 2007-08 global financial crisis. We also discuss
unconventional monetary policies during the crisis period and the desire of the Fed to return to normal time
policies as the economic situation improves.
Keywords: Monetary Policy, Taylor Rule, Global Financial Crisis
Jel Codes: E52, E58, G01
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