The Research On Anti-crisis Monetary Policy Tools The Fed Innovated

On April2,2007, New Century Financial Corporation filed for bankruptcyprotection, which is the U.S. second-largest subprime mortgage company. This eventmarked the subprime mortgage crisis. Then, after entering into2008, a series offailures of financial institutions turned the subprime mortgage crisis into a seriousfinancial crisis. Like the great crisis in the thirties of the20th century, this crisis notonly rapidly spreaded to many countries and regions in the world, but also affectedthe real economy. And the global economy was lost into recession. Facing to theserious problems of economic operation, the Federal Reserve System(Fed), as theregulator of the economy, announced the use of "quantitative easing" monetarypolicy in order to put liquidity to the market. To make sure the policy can beeffectively implementated, the Federal Reserve not only reformed the traditionalmonetary policy tools, but also created a series of new monetary policy tools speciallyfor this financial crisis. It can be said, the Fed has conducted a very active anti-crisismanagement facing the same serious crisis.This thesis is to start the new study on the new monetary policy tools which theFed innovated against the crisis in the backdrop of financial crisis. In the course of thestudy, we used the combination of the qualitative research and the quantitativeresearch. Through the qualitative research we explained what the new monetarypolicy tools were and how they worked; through the quantitative research we studiedthe effectiveness of the new monetary policy tools. To this end, the paper selected themonthly data from December2007to March2010and four variables (the broadmoney supply, TAF, the federal funds rate and the severity of the financial crisis) toconstruct the VAR and VEC models for empirical analysis. The results of theempirical analysis showed that the innovative monetary policy tools were effective toease the liquidity pressure triggered by the crisis. However, these innovativeinstruments of monetary policy is only established in response to the crisis. So whenthe economy started to recover, the Fed must consider the appropriate exit mechanism.On the other hand, China also has to prepared to deal with international contagioneffects that the new monetary policy tools brought.