A Study On The Interest Rate Policy In The Post-War U.S

The US economy has performed well for more than sixty years since the end of the World War II. What makes the long-term stability of the American economy and why the US can situate the first position of world economy since the end of World War II? A great deal of research efforts and fruitful achievements have been made by many institutions and scholars form domestic& international. All these researches have given some reasonable explanations from different aspects. But research about the role of US interest rate policy after the post-war is scarcely. Monetary policy and financial policy is the two main policy instruments on macroeconomic adjustment. As a vital part of monetary policy, interest rate policy plays a more and more important role. Especially in the late 1990s, the Fed accepted "Taylor Rule" and executed a neutral monetary policy pegged to the real interest rate, and along with a strong dollar, which brought prosperity of the "new economy" represented by high-tech, information industry. Taking the transformation of post-war American interest rate policy and its backgrounds as the main clue, adopting a history and logic study method, this dissertation makes a theoretical research and empirical examination of the correlation between the postwar American interest rate policy and several economic variables. Then some suggestions have been given to China's interest rate policy reform based on the research.This dissertations divided into four parts, specifically as follows:The first part is the introduction. This part summarizes the research background; demonstrates the research significance; inquires the current research at home and abroad; describes the research method, content and clue; and points out the innovations and shortcomings of this study.The second part is the second chapter, which is also the theory part of the interest rate policy research. This part giving a review of some main interest rate theory such as the Classical theory of interest rate, the Keynes interest-rate theory, the Monetarism interest-rate policy, the Financial Repression and the Financial Deepening theory, which provides a theoretical basis of study and analysis for subsequent chapters.The third part contains the third, fourth and fifth chapter, mainly describes the transformation and backgrounds of the US post-war interest rate policy, and makes a theory and empirical research of its impact on the economic development.The post-war American interest rate polices transformation have been divided into four stages in this dissrtation, so the theory and empirical research of its impacts on economic development are also conducted in these four stages.The first period is the low interest rate policy between the end of World Warâ…¡and the 1970s. Most of the time between the World Warâ…¡and the early 1970s, the Fed kept a low interest rate at 4% except in the late 1969 and 1970 (with a 6% rate) on the basis of the Keynesian theory. The implementation of low interest rate policy effectively invokes a rapid growth of America economy in the 1950s and 1960s. But in the 1970s, the sound stimulations of American economy gradually disappeared, and the other potential conflicts came to burst. Then the low interest rate policy deteriorated the inflation, and the rising consumer price index brought more negative effects on the American economy, which further aggravated the "stagnant" degree, and finally led the American economy into a serious "stagflation" situation in the 1970s.The second period is the high interest rates policy in the 1980s. The guiding ideology of American interest rate policy began to turn to modern monetarism theory represented by Friedman in 1979, this theory insisted that the money supply should be controlled to curb inflation and ensure the economic growth was moderate. In 1979, the global oil prices surging caused by Islamic revolution in Iran deteriorated America inflation expectations. In order to control inflation, the Fed raised the interest rate sharply and maintained it in a high level throughout the 1980s. The implementation of high interest rate policy in1980s has curbed inflation effectively and reduced it year by year. The high interest rate attracted foreign capital inflow into American and offset part of its deficits, but also caused the exchange rate rise, which weakened the export competitiveness of the US goods and resulted in the increasing trade deficit.The third period is the neutral monetary policy pegged to the real interest rate in 1990s. The Fed adopted the neutral monetary policy pegged to the real interest rate based on "Taylor rule" in 1990s. Neither to stimulate the economy nor to inhibit it, that ensured the economy to develop on its potential growth rate in a low level of inflation. The implementation of the neutral monetary policy produced the tech bubble, made the American economy realizing a low inflation and high employment, created the economic myths in 1990s far more than any of the American economic expanding history.The forth period is the low interest rate policy in the early 2000s. The low interest rate policy in 1990s not only brought prosperity of the "new economy", but also created a big IT bubble. With the slump of NASDAQ composite index, the IT bubble began to burst, the economy growth turned down. The American economy slowed significantly caused by the soaring oil prices, the dollar appreciation, the interest rate rising and the fixed capital investment atrophy in the beginning of the 21st century. In order to stimulate the economy, the Fed cut the interest rate sharply, which finally produced the later sub-prime crisis. In 2004, the Fed rose the federal funds rate continuously because of the strong worries on the inflation, which trigged the American sub-prime mortgage crisis, resulted in the fail of U.S real estate industry and bank system, and shocked the world economy heavily.The fifth chapter is the empirical research on post-war American interest rate policy. This chapter makes a periodical model examination of the interactions of four economic indexes including the federal funds rate, GDP value, inflation, unemployment and the money supply, and the correlation analysis are given based on the examination result.The fourth part is the sixth chapter.This part puts forward some suggestion for China interest-rate policy reform based on the previous research of post-war American interest rates transformation. The lessons provided by the American interest rate policy are mainly manifested in the following aspects:The first is to promote marketization of interest rate. Including gradually improve the efficiency of the central bank (the People's Bank of China) interest rate system; rationalize the relationship between the benchmark interest rates and market interest rates; develop capital market vigorously, especially the bond market. The Second is to complete the financial market system. Including complete rate mechanism; perfect the inter-bank market; develop the money market and improve the microeconomic foundation of interest-rate policy. The third is to strengthen the independency of the People's Bank of China. Including make the interest rate policy independently, improve the execution capacity of its branch, use comprehensive rates to enhance the effect. The fourth is to adjust interest rate suitably. The fifth is to prevent mortgage interest rate risk. Including enriches the means of rate adjustment; develop options or futures market; adjust timely to control asset price bubbles.On the basis of previous scholars' studies, this dissertation made the innovation in the following aspects:1.This dissertation made a mutual model examination between the interest rate and other several economic varieties, not only examine the interest rate influence to the economic varieties, but also examine the economic varieties impact on the interest rate, which provided a more comprehensive research.2. This dissertation testified that the relation and mutual influence of interest rate and GDP, inflation rate, unemployment rate, monetary supply are quite different in specific stages, so when applying the interest rate to adjust economy, the different economic background should be noticed.3. Compared with some similar researches, this dissertation choused a relative longer date period that covered the end of the World Warâ…¡to the end of the 20th century. Because the selected data is quite long that effectively avoid deviation problems due to fewer data, and the conclusion is more reliable, then the correlation between the post-war American interest rate policy and the other economic indexes are better explained.