Monetary policy during financial crises

By Cristina PORUMBOIU,
2nd year REI, group 934

After a long period of time of economic expansion, the world economy faced the greatest
challenge, another financial crisis. Starting with the year 2009, the most of economists began to
analyze the similarities and the differences between this business turbulence and the worst
economic period of the last century, the Great Depression (1929-1933). The first step to
understand the economic effects of this chaos is to analyze the measures imposed by the
central banks in order to subprime the crisis, meaning to focus on the new monetary policies.
Personally, the point of discussion should not be about the effectiveness of the new
measures imposed by the central banks during different times, but what are the effects of these
policies taken into consideration the new business environment. What is for sure an
unchangeable fact is the need of these types of interventions especially when a crisis begins.
In order to analyze the current financial crisis, there are three factors which should be
taken into considerations. Firstly, how the innovations in the financial area are driven is very
important because the mismanagement makes the system inefficient. Also, the financial
innovation can be the key to an economic recovery as while as it does not follow a destructive
process .Then, another factor is the asset price bubble. The last factor explains the contraction of
the economic activities because of the deterioration of the financial institution balance sheets.
The principal objective of the monetary policy regards the stability of the financial
system, even if there are normal or abnormal business conditions. To emphasize the inefficiency
of the monetary market it is necessarily to look at the interest rates and what should be done in
order to have economic recovery after a financial turbulence. It is considered that the monetary
policy is not efficient because of the failure to lower the cost of credits. However, there is a
strong correlation between the decisions regarding the monetary policy of one country and those
of one country whose currency serves reference currency.

Speaking about the instability of the financial system during a crisis, the discussion
should point out two types of risks. The first one is the valuation risk, meaning the part of the
excess return to an asset, with respect to the time-preference shock. The other one is the
macroeconomic risk which is very important for peoples expectations, especially regarding the
level of inflation.
To sum up, the monetary policy, even if it is effective or not, is an important factor that
influence human behavior. The misunderstanding of financial system and the measures imposed
during a crisis, influence the willing to consume, to save or to invest. The information is
asymmetric; it is shared differently from one point to another and this is the reason for which the
level of uncertainty increases. From a personal point of view, the monetary policy is effective
just in those cases in which the population understands the necessity to contribute at the
economic recovery by continuing to consume and to invest in the similar conditions, meaning
that the central banks build crediblity and can warranty a certain level of stability for the
financial markets.

References:
o Mishkin, F.(2008) Is monetary policy effective during financial crises?, National
Bureau of Economic Research
o Partachi, I., Mija. S., (2013)- Monetary policy instrument for macroeconomic
stabilization, Procedia Economics and Finance, no 20, pp. 485 493
o Ruiz, J.,(2015)- Risk aversion and monetary policy in a global context, Journal of
Financial Stability
o Albuquerque,R., Eichenbaum ,M., Rebelo, S. (2012)- Valuation risk and asset pricing,
National Bureau of Economic Research
o Iwata, S., Wu, S.,(2003)- What Macroeconomic Risks Are (not) Shared by International
Investors?, The University of Kansas, Working Papers Series in Theoretical and Applied
Economics, Working paper number 200302
o Pennings,S., Ramayandi, A., Tang. H,- The impact of monetary policy on financial
markets in small open economies: More or less effective during the global financial
crisis?, Journal of Macroeconomics, no 44, pp. 6070