1.0 The Global Financial Crisis and Its Impact
The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In October 2008, the collapse of the major financial institutions and the crash of stock markets marked the peak of this global economic slowdown (Euromonitor International, 2008).
Although the origin of the GFC might have been the housing and financial crisis in the US, it affected both developed and developing countries in a devastating way. More specifically, the crisis has destroyed global financial systems and government budges, strike the confident and security of financial markets. It was universally recognized the worst global economic downturn since the Great Depression in the 1930s (Ciro, 2012). Before the financial crisis, the increasing food and oil prices had affected the non-producers and because of the developed economies are more integrated within the global financial systems and markets, they were the worst affected by the GFC in the short term. Developing countries were looking more optimistic in the short term as their economies were not as integrated into the global financial market system. Nevertheless, the escalated impact of the crisis did affect the real economy of developing countries especially on the export-orientated nations. As the demand of goods and services has been weakening from the developed countries, the output of manufacturing or services companies decreased, which directly related to the increased rate of bankruptcy and unemployment as well as the real GDP growth (Euromonitor International, 2008).
Today, the world’s economy has barely recovered from the crisis, it is important to evaluate what policies have addressed the impact of the GFC effectively. This paper argues that as economic instruments, as the tools of monetary and fiscal policies, quantitative easing, credit easing, stimulus package and taxes cutting have been extremely important for the policy responses from the governments and central banks.
2.0 Responses to the GFC
When an economy is experiencing a recession, consumers reduce spending as much as before, businesses decline its production that means less people get employed, which causes more people stop spending. Therefore, a country’s government and central bank are expected to turn the economy to the opposite direction from where it is headed (Mathai, 2012). As the GFC sweeping down the economies around the world, fiscal and monetary policies were the two major instruments that governments applied to saving their economies during the GFC.
3.0 Monetary Policy
3.1 Conventional Monetary Policy
Monetary was one of the key instruments for...