An Empirical Study of the contribution of monetary policy instruments in the recurrence of financial crises in economic systems
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Date
2018
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جامعة المسيلة
Abstract
Monetary authorities intervene in any country whose economy is exposed to shocks in order to reduce its negative effects, by uses of several quantitative and qualitative mechanisms to influence the quantity of money traded in the market, whether expansionary policy in the case of recession or a policy of deflation in the case of inflation.
The re-discounting mechanism is one of the most important policies of the central bank to influence the ability of banks to provide loans and as an intermediate target for influencing monetary market interest rates, which reflects the return on investment and has a significant role in directing capital between the monetary and financial markets.
In addition to the first mechanism, the monetary authorities intervene to correct the imbalances by following the open market policy, through the sale of securities - stocks and bonds, especially in treasury bills, are used to affect the rate of return on them.
The effectiveness of these mechanisms remains dependent on the availability of several conditions, and these mechanisms often lead to shock-based treatments, but have other implications in the future. So that the lowest of interest rates often result in speculative bubbles in the financial market because institutions and households are encouraged to lend due to its low cost, and they use them to speculate in financial markets. Once interest rates return to their true level, borrowers will be unable to pay their obligations, which led to a speculative bubbles explosion, that’s what happened in the Internet crisis and mortgage.
To test the effectiveness of monetary policy in dealing with financial crises, especially its role in the emergence of speculative bubbles that cause the recurrence of financial crises, we chose the US market as the cradle of financial crises, and the French market to support the opinion more and the availability of necessary data for the study.
To study the relationship between the monetary policy tools adopted by the monetary authorities and the prices of securities - stocks and bonds in the financial markets, we used several tests as well as the correlation between the variables, then we tested the stability of the time series studied over time using the ADF test, finally we tested the causality using the Granger test. Using E-Views 7.
Monetary policy instruments can be a circumstantial mechanism for managing financial crises, but in the future play a negative role that leads to other crises by time, as demonstrated by the tests used in the study.
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financial crisis; monetary policy instruments; financial market indicators; correlation; causality. Jel Classification Codes: E65, C52.