The unconventional monetary policies implemented by the Bank of England, U.S. Federal Reserve and the European Central Bank in response to the financial crisis
The signification of the financial crisis followed the collapse of Lehman Brothers in September 2008 caused the decrease in the market activity and the growth of globalization economy. A vast of problems, such as deflation, reduction in capital liquidity and so forth, confront with each government and central bank as well as having significant negative effect on development of economy that lowering of GDP. After the financial crisis erupting and spreading to all around the world’s financial condition, some measures for example, lowering of interest rate and keeping the reserve requirement lowing, implemented by central banks aimed at stabilize market price and funds liquidity to support aggregate demand. However, actually, the central banks’ interest rate is very low in United Kingdom, European system and United Stated, which is closing to zero bound, so that it is difficult for central banks to maintain financial condition and support a further stimulation via tool of interest rate (Benford et al, 2009). Meanwhile, commercial banks reduced the aggregate of bank loans in order to remain sufficient reserve and prevent their value of assets, because not enough money expand their investment to profit with high risk investing environment. Therefore, Bank of England, European Central Bank and U.S. Federal Reserve generate a series of non-standard monetary policies called unconventional monetary policies to avoid the threat of a liquidity trap (Loisel and Mesonnier, 2009).
This essay will discuss what unconventional monetary policies implemented by Bank of England, European Central Bank and U.S. Federal Reserve, in addition, explain how successful have these monetary policies been on money market and economy respectively.
In this part, we describe that what unconventional monetary policies followed by Bank of England in response to the financial crisis. The Bank of England’s Monetary Policy Committee (MPC) made a decision to enlarge the money supply via asset purchases to inject a large amount of funds into market that increase in liquidity and reduce the bank interest rate. According to Bank of England, the purpose of monetary policy is to keep price stability that is maintaining the inflation target rate at 2%, because the lending rate will be affected by the bank rate. In practice, the policy of asset purchases has been defined as quantitative easing. Quantitative easing is normally used to expand the central bank’s balance sheet to supporting aggregate demand that provide a stimulus to money market (Bernanke and Reinhart, 2004). Sometimes, there is another policy that changing the composition on the balance sheet of central bank is referred to as credit easing. The Bank of England has played an important role on money market because the bank can create new money by sterling or...