What role did monetary policy play in the Great Depression and other crises? Flashcards
1
Q
What role did monetary policy play in the Great Depression and other crises?
A
- Monetary Policy as a trigger in GD
o tight monetary policy in late 1920s - Fed increased IR to stop speculation - slowed economy down and contributed to GD
o failure to act as a lender of last resort - Fed didn’t provide enough support to failing banks - made banking crisis worse - Deflationary Spiral Due to Monetary
Contraction
o GS constraints - stopped CB from printing more money to combat GD
o debt deflation - prices fell = increased real value of debt = harder to pay loans back - Role of monetary policy in other fc
o Post WW2 and Bretton Woods era - Fixed ER set post WW2 but led to crisis in 70s - CB couldn’t balance ER stability with domestic needs - led to collapse of BW - Monetary Policy in 2008 FC
o Loose mon pol before crisis - CB kept IR low - cheap credit = risky lending = housing bubble
o response to crisis - CB lowered IR and established QE to stabilise markets - recovery but raised asset prices - Eurozone crisis
o ECB limited response - slow due to focus on controlling inflation
o unconventional policy tools - LTROs and OMT
