Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi
Chapter 2: The Role and Effectiveness of Unconventional Monetary Policy
Peter J. Morgan 2.1 INTRODUCTION The global financial crisis of 2007–2009 was perhaps unique in that it saw short-term interest rates fall to nearly zero in a number of countries. Countries with policy rate targets of 0.5 percent or less included the United States (US), Japan, the United Kingdom (UK), and Canada. Although Japan was the only Asian country with official rates this low, short-term money market rates sank to nearly zero in a number of other economies, including Hong Kong, China; Singapore; and Taipei,China (Figure 2.1). % 5 4 3 2 1 0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Hong Kong, China Japan Singapore Taipei,China Source: CEIC Data Co. Ltd Database (accessed 16 July 2009). Figure 2.1 Asian economies with overnight interbank rates near zero (monthly average) 27 M2840 - KAWAI 9780857933348 PRINT.indd 27 24/01/2012 13:18 28 Monetary and currency policy management in Asia Because conventional monetary policy operates mainly by setting interest rate levels, this meant that the limits of conventional policy had been reached in these economies, and that any further monetary stimulus must be obtained from ‘unconventional’ means. The global financial crisis was also characterized by a breakdown in the normal transmission mechanism of monetary policy. Reflecting a sharp increase in the perceived risk of insolvency of financial institutions and other firms, spreads widened sharply in a number of markets, including those for interbank deposits, commercial paper, corporate bonds and bonds in emerging economies. Some markets stopped functioning...
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