The US monetary performance prior to the 2008 crisis

Abstract

This article uses a Structural Vector Autoregressive (SVAR) approach to study the different shocks to the monetary performance in the two decades of the US economy prior to the 2008 financial crisis. By using the Federal Fund Rate as a measure of change in the monetary policy, this study shows that interest rate expectation is informative about the future movement of Federal Fund Rate and the anticipated monetary policy should be one of the crucial reasons in causing monetary and financial deterioration in the US economy. This article discusses a possible conjecture of a low interest rate trap when a persistent and prolonged low interest rate regime led to financial instability.

Keywords:

• monetary shocks
• interest rate
• financial crisis

JEL Classification::

• C32
• E52
• O51

Acknowledgements

Research funding from the City University of Hong Kong in the form of Strategic Research Grant (Grant number: 7008129) is gratefully acknowledged. The author is thankful to Mark Taylor, Sven Arndt, Alan W. K. Wong and anonymous reviewers for their comments, and research assistance from Douglas K. T. Wong and Siyang Ye. The usual disclaimer applies.

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