Impact of unconventional monetary policies on the markets and economies

Abstract

The credit crisis highlighted the stress of the global financial system towards to second half of 2007 and the liquidity of the system was put to test. Central banks across the globe reacted to the financial crisis by increasing the scale of their operations targeted at increasing liquidity and took to conventional means – like adjusting the short-term interest rates in the hope of reviving the economy, without significantly altering the size or composition of their respective balance sheets. Actions in response to the crisis during the first year varied substantially – at one end was the US Federal Reserve or the Fed which slashed its fund rate target aggressively in its attempt to offset the impact of large spread on the market rates, while on the other hand the ECB (European Central Bank) raised its refinancing rate by .25% point (July 2008) fearing increased inflation expectations.