Case Study 1: Interest Rate & Monetary Policy: Steering Monetary Policy Through Unprecedented Crises
About the Case. What? The Fed again? And interest rates again? Isn’t this old?
We’ll this is a Fixed Income course … interest rate levels and Central Bank Policy on its level of interest rates remains a big component/outlook in bond markets.
This Case is a good, general, background, historical reading on Central Bank Policy — pre-ECB [German]; pre-Fed [Bretton Woods]; ECB [during its initial years].
Then the Case get to contrast these central bank actions [re interest rates] in response to the Sub-Prime Credit Crisis which originated in the U.S and subsequently impacted global markets and economies.
This is about twelve years old and pre-dates some students — this Case is a good historical perspective of this crisis for those who are not a familiar with it. From 2008, it had lingering consequences for as long as EIGHT years.
Yes, this Case was twelve years ago, but history also repeats itself in the financial markets — now we are facing a social crisis wrapped in and economic crisis caused by a health crisis. And in another year or two, we will know soon enough if it becomes a financial crisis.
Case Guidance: what to submit. Economic policy decisions are much easier to make in retrospect than in prospect. They are also much easier to make if all the evidence points in one direction. Unfortunately, the available information and data often are ambiguous, contradictory, and sometimes point in different directions. In early 2008 the U.S. and European officials clearly were viewing much the same information but came to different policy conclusions. Some have described this as “viewing the same mountain but from different lookout points”.
Please draft a short essay (3-4 pages perhaps) discussing the different emphasis which the policymakers placed on the available information and the historical and structural perspectives from which they viewed this information to arrive at the decisions that they made.
PS: upon completion of this older Case, it should give you the background of a financial crisis, some perspectives, how Central Banks operate, to prepare you for the following weeks. We will continue on the topic of financial crisis and have a lot more opportunities in the class to discuss the ongoing COVID-19 situation, its impact on the economy, the financial markets, and Central Banks around the world’s response (different?) to the uncertain situation. PS: Merkel has a change of heart in 2019 July; what happened? And newly-elected President Biden insists on a massive $1.9 trillion COVID-19 Relief/Stimulus Package.
