25 years: Economic commentary & banking
In this second part of Frances's video on central banks, she covers some of the history that shaped the role they hold today, including the Great Moderation and the financial crisis.
In this second part of Frances's video on central banks, she covers some of the history that shaped the role they hold today, including the Great Moderation and the financial crisis.
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12 mins 41 secs
The financial crisis caused a dramatic shift in monetary policy. Prior to the financial crisis, central banks used interest rate policy to control inflation. Since then, more unconventional forms, such as QE have had a huge impact on the global economy. However, central banks are now demanding an entire change of emphasis, suggesting that governments should share responsibility in restoring the economy.
Key learning objectives:
Identify the monetary policy utilised pre and post-crisis
Define the Great Moderation
Identify what the central bank should do next
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The period between 1993 and 2008. During this time, inflation in developed countries remained low and stable. Major developing countries such as China industrialised rapidly, pouring cheap goods into Western countries.
QE pumped up asset prices all over the world, stock markets boomed, the price of prime real estate shot up, and commodity prices rose. The owners of assets have benefited from QE. There is also some evidence that employment rose faster in countries where the central bank was doing QE.
Central banks are still targeting inflation and primarily using interest rates to manage it. But whereas before the crisis, central banks feared that if they cut interest rates too much, inflation would take off, now they fear that inflation will fall below zero, and they will be unable to raise it. This is seen in the case of Japan, where inflation has been at or near zero since 1990.
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