An Analysis Of The Financial Stability Effect Of The Fed 's Quantifying Loose Monetary Policy During The Crisis

With the economic globalization, the interaction and liquidity risk conduction between the global financial markets and financial institution continuously strengthen, which make the cause of the financial crisis more complex,have profound influence as well as pose a challenge to the function of central bank and monetary policy. The central bank pay more attention to financial stability and implement monetary policy cautiously within the recent financial crisis. If the financial stability cannot be maintained, monetary policy transmission mechanism will be blocked and its effect also will be disserved. There are different academic debates on the relationship between monetary policy and financial stability. But in terms of maintaining financial stability, to be sure, the central bank has an irreplaceable natural function. Especially facing financial crisis, in order to make the monetary policy, financial institutions and macroeconomic aspects maintain positive infiltration and relationship and eventually to promotes economic development, how the central bank can establish a flexible monetary policy to maintain financial stability according to the specific market environment and characteristics of the financial system and mechanism is incumbent upon monetary authorities, which is also supposed to be the important theories in the study of economic and financial academic research.In this paper, based on the traditional financial crisis and the validity of monetary policy theory as well as the function of lender of last resort, the mechanism of monetary policy’s implementation on financial stability during the financial crisis is discussed. And on the background of the subprime mortgage crisis, we analyze the Federal Reserve (FED)’s monetary policy framework, especially the quantitative easing monetary policy, which expands the functions of the central bank’s lender of last resort and has an important role in maintaining financial system stability. The fed expands the scale of balance sheet to address the financial and private sector deleveraging, inject liquidity into the market to increase asset prices, and repair the key departments’ the balance sheet. Due to the national balance sheet method has obvious advantages in research of financial stability, we focus on balance sheet changes among the monetary authorities, financial departments, residents and non-financial sector before and after the crisis, thereafter the real effect of monetary policy to restore financial stability can be concluded. On the basis of the above, the Vector Auto Regressive (VAR) model is built between the related indexes of the federal reserve’s monetary policy and the financial stability, the impulse response of monetary policy to financial stability is chosen as the key research, finally the corresponding conclusions and enlightenment can be obtained. In this paper, the main conclusions are:Firstly, in the face of conventional monetary policy ran into a liquidity trap, quantitative easing policy has a significant role in implementing and restoring financial stability. One the one hand, the commitment of zero-rate policy, can be used to guide the public expectations and improve investor confidence; on the other hand, through the expansion and structure adjustment of the balance sheet as well as innovation of series of monetary policy tools, the policy injects liquidity into the market directly and improve the financial sector and the private sector’s balance sheet by means of leverage transfer during the crisis. The leverage ratio of these departments is reduced, which means debt levels get down further. At the same time, constantly improvement of the quality of assets, stimulus on borrowing and spending market and avoiding excessive leverage to bring a deep recession, lay a good foundation for the real economy to improve.Secondly, the econometric analysis shows that the fed’s unconventional way to help financial institutions、residents and enterprise departments deleverage achieve good effect. First, financial and private sector balance sheet data are chosen to calculate the leverage ratio of each department, and then the VAR model between the monetary policy and the leverage of department can be established to conduct granger test and impulse-response function. Studies have shown that the federal funds rate down to zero commitment help financial institutions deleveraging, and the rapid expansion of the Federal Reserve assets can avoid it excessively. In addition, the private sector deleverage smoothly, especially the high debt levels of resident department be improved significantly. In the end, through the inspection of index respectively in response to financial market liquidity and asset price, we confirm the positive role of the fed’s monetary policy in financial stability.Thirdly, by comparing macroeconomic improved conditions, we found that the implementation of financial stability further promote the economic recovery. Output has been increased and deflationary pressures can be eased after the crisis. However, the job market, in the short term, has not substantive changes. In 2014, the federal reserve announced the retirement from quantitative easing policy, which means repair their balance sheets and reduce the money supply. Meanwhile, this action may also bring appreciation of the dollar and the international capital backflow, so as to put stress on the macroeconomic control pressure for other economies.