Research on Federal Reserve’s Monetary Policy Operations in Response to the Sub-prime Crisis
|School||Shanghai Jiaotong University|
|Keywords||subprime mortgage crisis monetary operation market liquidity|
The monetary policy rule is of great importance when central bank makes monetary policies. Choosing a single rule or discretion has always been an issue which worthies studying. The outbreak of the sub-prime crisis in the U.S. economy had a negative impact on its economy. During the current financial crisis the Federal Reserve has been acting as the "lender of last resort" to stabilize the financial system. Monetary policy operations have been used with great flexibility. These operations include intensifying the effects of traditional financial tools, making positive innovations, like a term auction facility, a primary dealer lending facility and other new tools. In this paper, based on the single-factor interest rate model, we conduct a study on the effectiveness of Federal Reserve monetary policy. The test results prove that during the crisis, the implementation of monetary innovative tools has a positive impact in reducing the market liquidity risk. Federal Reserve’s monetary policy operations have been proved to be effective in saving the market, which closely related to its money issuance system and open market operation system.Although currently there is no financial crisis in China, it is good for us to learn from the experience of United States. Our foreign exchange-based currency issuance mechanism makes monetary policy operations mainly depend on the deposit reserve ratio adjustment and open market operations. Through the impulse response function, co integration test and GRANGER causality test they prove effectiveness of these two foreign exchange hedging instruments are limited. The limitation lies in that China’s monetary policy system is still to be improved. Although in the short-term, the likelihood of sub-prime crisis in China is small, China should speed up the pace of construction of the currency market, improve our interest rate transmission mechanism and enhance the effectiveness of monetary policy operation.