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What Lessons can be learned from the Global Financial Crisis of 2007-08, About the Effectiveness of the Transmission Mechanism of Monetary Policy - Assignment Example

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What Lessons can be learned from the Global Financial Crisis of 2007-08, About the Effectiveness of the Transmission Mechanism of Monetary Policy

The crisis has adversely affected the financial as well as economic stability of a large number of countries, imposing inevitable unfavourable impacts on the financial institutions, national governmental structures and stock market performances worldwide. It had also created a strong adverse effect on the business world, leading to gradually deepening fluctuations in the housing markets and increased unemployment rates in the majorly affected economies such as the US (as the epicentre of the crisis) and the European nations among the majors. It has been identified the most common cause for the crisis situation was associated with the low interest rate policy practiced by the Federal Reserve along with central banks (Grail Research, 2009). As assumed in the transmission mechanism of monetary policy, such violations in the interests rates are likely to lead towards a severe instability in the housing markets, disposable income disbursements in the economy, credit demand, exchange rate fluctuations, stock market volatility and overall wealth generation obstructions (Bank of England, n.d.). Evidently, the crisis situation also exhibited fluctuations and instability in various other key determinant factors that are supposed to act as major components to economic development, which include subprime mortgages, ineffective regulatory policies and leveraging the banking sector as prima facie (Grail Research, 2009). In this crisis situation, the Federal Reserve and central banks of different countries were identified to focus on building their respective monetary policies on the basis of short-term interest rates, which can also be accounted as a major cause to have a strong influence on the aforementioned factors in the global money market (Lewis, 2010). As can be observed from the brief discussion presented above, the context of the recent global financial crisis 2007-08 represents a complex phenomenon of interest rate based monetary policy measures taken by countries in the post-modern era. To obtain a succinct understanding of the entire occurrence, this essay will base its discussion on the conceptual framework of transmission mechanism of monetary policy. In this regard, the sole aim of the essay will be to conclude on the effectiveness of the transmission mechanism of monetary policy in addressing the lessons learned from the recent occurrence of the global financial crisis in 2007-08. The Transmission Mechanism of Monetary Policies The transmission mechanism of monetary policies depicts that there are different procedures on the basis of which, interest rates in an economy can be identified and assessed to be affecting the economic conditions of a country as a whole (Refer to Appendix Figure 1). As per this theory, the decisions in relation to interest rate are seemed to influence other market interest rates, which include deposit rates of bank and mortgage rates to a significant level; thus, creating a significant effect on the economic stability of the nation. The interest rate policies further affects the expectations along with confidence of the market investors, on the basis of which, these policies tends to influence the future development of an economy (Bolvin & et. al., 2010). Additionally, the interest rate policies influence exchange rates along with asset prices to a substantial extent. Changes in interest rates are further recognised to have an influence on the spending, investment as well as saving behaviour of the people and firms operating in an economy, playing the role of a major determinant of ...Show more


The global financial crisis, which occurred during the year 2007-2008, has been recognised as one of the worst crises ever faced by the word economy…
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What Lessons can be learned from the Global Financial Crisis of 2007-08, About the Effectiveness of the Transmission Mechanism of Monetary Policy essay example
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