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What Role Did Monetary Policy Play In Housing Market Development

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The Role of Monetary Policy in Housing Market Developments

Introduction
In light of the question, what role did the setting of monetary policy play in housing market developments? This paper will examine what role monetary policy had in the housing bubble and consequently the financial crisis of 2007-2008. Next I will briefly look at how monetary policy is utilized and what obstacles are faced when considering the appropriate policies to influence the economy. Finally, I will explore other factors that may have had an impact on the crisis.
Discussion
Dokko et al., (2009), concluded that the low interest rate, experienced as a result of the 2001 recession and kept low for a substantial amount of time, throughout 2004, was only a minor …show more content…

It does this by the buying and selling of federal bonds, changing the discount rate, or changing reserve requirements (Rittenberg, & Tregarthen, 2009, p.262). The main goal of monetary policy is to avoid a recessionary gap or contrarily an inflationary gap. Maintaining stability by predicting the future direction of the economy and taking measures to counteract any fluctuations in the economy. The largest challenge facing The Fed in its decisions to implement policies would be the problem with lags. Recognition lag is the delay from when a problem arises to when it is realized, often a matter of several months. Implementation lag is the time from recognition of the problem to the enactment of a policy to deal with it. Finally impact lag explains the delay from the enactment of a policy until it impacts the economy. The combined lags in the process of implementing a monetary policy may take years before any results are seen (Rittenberg, & Tregarthen, 2009, pp. 267-268). Economists do not always agree on which policies are the most effective and …show more content…

With the repeal of the Glass-Steagall act of 1933, investment and commercial banking operations could merge, giving investment banks the incentive to take greater risks, lowering equity requirements. Calabria, (2009), argued that in fact financial regulators and regulations increased in the past decade, contrary to what many people believe. Calabria goes on to point out that the down-payment requirements of obtaining a Federal Housing Loan have been greatly reduced from 20 percent in the 1930s to only 3.5 percent as of

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