Economics of Banking

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Submitted By Teo88
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We observe very large and rapid declines in the policy rate (the very short rate) in late 2008 and early 2009. Considering the US, the UK, and Japan, did long rates fall as much around that time or less or more?

In late 2008, many developed economies where in or close to recession, with growth slowing noticeably in the emerging economies. These events prompted an easing of monetary policy and expansionary fiscal measures in many countries (Reserve Bank of Australia, 2008).

The policy rate is the target 'cash rate' set by central banks. This is also the market interest rate on overnight funds, which is used as an instrument for monetary policy (Mishkin, 2013). The long rate is also known as Government securities, or ten-year government bonds.

After conducting an analysis from the data in graph 4.1 and 4.4 (Appendix 1) of the Bank for International Settlements 2012 Annual Report (Chapter 4), it can be said that the long rate fell less than the policy rate on average. The results were as follows:

In the US, the long-term rate fell from 3.75% to 3.00%, a change of .75 percentage points (bps), whereas the policy rate fell from 2.00% to 0.25%, a change of 1.75 percentage points. This indicates that the long rate fell less than the policy rate.

In the UK, the policy rate declined noticeably compared to the long rate during this time. The UK’s policy rate experienced a rapid fall from 5.00% to 0.50%, a change of 4.50 percentage points. The long rate did not experience such a decline, falling from 4.25% to 3.50%, a change of .75 percentage points.

However, in Japan both the policy rate and long-term rate fell by the same margin. The long-term rate fell from 1.75% to 1.50%, a change of .25 percentage points, whereas the policy rate fell from 0.50% to 0.25%, also a change of .25 percentage points.

Policy rate
Country 2008 (Sep) 2009 (Mar) Decline…...

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