Policies and Interest Rates During the Crisis: A Dynamic Approach

©2012 – Daniele Stanizzi Page III Introduction The following research thesis is a study of the recent crisis that struck the global economic system in recent years. Throughout this study, we will focus on the cause and effect of the recession, and the actions that governments and authorities have undertaken to contain adverse consequences. The first step is to give an overview of what happened, examining the historical facts that have followed through these recent years, starting with a description of the mortgage crisis in the United States, which was also the triggering event. We will illustrate its functioning and how the bubble swelled and burst in 2007 as a consequence of the ceasing of the upward trend in housing market prices. Then we will discover how this paralysis spread beyond the American system, infecting the main economies all around the world. This study is mainly concerned with the British, European and American macro areas, and for each of which an attentive analysis will be carried out. Indeed, the following step is the purpose of this research, and it will consider the measures employed by governments and central banks to control the adverse consequences of the crisis. Specifically, a thorough examination will be conducted to estimate the effects that were yielded in the aforementioned economies. This analysis will also allow us to conduct a ‘diagnosis’ of these macro systems and simulate hypotheses over the evolution of the recessive trend. We will look in detail at the monetary and fiscal policies undertaken by the Bank of England, European Central Bank, Federal Reserve and their respective governments. A crucial theme to the analysis is that of interest rates; we will see how this variable is fundamental within the economy and markets in general. As a matter of fact, the influence of interest rates is somehow dominant in every aspect and for this reason we will look at their direct and indirect effects on the main macroeconomic variables, such as inflation, GDP, production and economic growth, in order to evaluate the conditions of the economies at the focus of this study. The research will be conducted as follows: we will gather and plot economic, macroeconomic and financial data over the period of the last twelve years. This will clarify the trend of the economies even before the crisis, starting from the dawn of the new millennium; this will provide a significant visual disruption that, unsurprisingly, coincides with years 2007 and 2008. As previously mentioned, we have decided to limit the selection of our analysis to the areas of the United Kingdom, Eurozone and the United States; we believe this choice is the most sensible not only because they are the three biggest macro economies we are influenced by, but also because they are very influential on the rest of the global economies. Furthermore, these are the systems that are suffering the most adverse of consequences as a result of the recession; therefore, their analysis is crucial for a thorough understanding of the