The Relations Among Loose Monetary Policy and the Housing Bubble and the Financial Crisis of 2008

Abstract

This paper examines whether the loose monetary policy was a key factor in the 2006 housing bubble and then led to the financial crisis of 2008. It analyses the situation of the US economy during the early 2000s. It presents how the role of the Federal Reserves Monetary strategies such as the Expansionary Monetary Policy created an easy credit environment and investors' overconfidence in the US. Furthermore, this paper delves into the Taylor rule and explores the principle for adjusting nominal interest rates based on economic fluctuation and inflation. This framework is crucial in understanding the policy decisions of that time. In addition, this paper outlines the different perspectives on the Monetary Policy from the John B. Taylor and Bernanke who was defend for the Federal Reserve that fears of deflation and the restrictions brought about by the liquidity trap during that time. The paper also reveals labour market, including unemployment and output gaps, indicated economic strength but also inflationary pressure. In conclusion, this paper emphasizes the importance of a multifaced approach to monetary policy analysis in understanding the intricate factors that led to this pivotal event in economic history.