Origins and Policy Implications of the Crisis
Origins and Policy Implications of the Crisis
This chapter takes an empirical approach towards detecting the causes of the financial crisis of 2008. Using econometric techniques and focusing on the aspects amenable to economic analysis, this chapter presents some strong conclusions. The analysis answers the following questions: “What started it? What prolonged it? What made it so severe during the fall of 2008?” The chapter first takes on the view that this financial crisis was precipitated by monetary excesses that took the form of low interest rates, which in turn contributed to excessive risk taking in search for higher yields. The Taylor rule, which describes how monetary policy worked during the 1980s and 1990s, is administered in the analysis to measure the excess. Getting to the narrative of the financial crisis, therefore, is of utmost importance. In effect, the chapter notes two views on its causes, namely: “the markets did it” and “the government did it”.
Keywords: financial crisis of 2008, econometric techniques, economic analysis, monetary excesses, low interest rates, Taylor rule
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