Central Banks and other International Banks Describe when and why central banks buy either their own currency or the currency of another nation inan effort to control exchange rates. The central bank is vital to every modern economy in as far as monetary and fiscal policy is concerned. In the forex market, the bank may purchase foreign currency using domestic currency to keep inflation and deflation in check (Basu, 2009; Topnews, 2011). This helps in valuing or devaluing a particular currency in case of need. To increase the value of a currency, the central bank will buy the currency and hold huge quantities of it in its reserves thereby reducing its supply in the market.
In some cases, the central government may place restrictions con how to hold and use foreign exchange or how to dispose local currency. 2. What did the central banks do to stabilize the financial systems in 2007–2009? In order to stop the financial crisis, central banks across the world followed plans that were almost parallel inaction. The eurozone, US and Britain central banks cut interest rates almost to zero, injected capital in the markets (through massive stimulus programs) and guaranteed bank lending (Allen, 2008).
These actions were taken in a bid to restore investor confidence and liquidity. In some nations, the central governments have endeavored to coordinate debt issuance with an aim of avoiding the destabilization of their financial markets. 3. In an effort to stabilize the financial system how much money, in U. S. dollar equivalent and as a percentage of the countrys GDP, did the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009? The Central banks responses to the financial crisis were quick and dramatic.
The US pumped close to one trillion USD in total in 2008 and 2009 in two massive stimulus packages. In the final quarter of 2008, the European Central Bank and the US Federal Reserve purchased about 2.5 trillion USD worth of government debt and private assets from banks (Spiegel, 2008). Today, the US has spent about 11 trillion USD to the financial crisis about 9.8 trillion USD going to troubled US corporate entities including JPMorgan Chase and General Motors.
About 1.2 trillion USD has been set for use in the countries stimulus programs. Of the 9.8 trillion USD, about 6.4 trillion USD is set to be used in Federal Reserve Rescue Efforts. The Bank of China in 2008pledged to release 586 billion USD in the domestic market to stimulate the country’s economy (Morrison, 2009). 4. How well did each countrys efforts work at stabilizing the economy? The central banks of most countries have worked in coordination with their counterparts elsewhere cutting short term interest rates.
Even the Peoples Bank of China joined the major economies in cutting interest rates. The central bank interventions worked positively for all the countries in mitigating the effects of the financial crisis. In fact, the effects of the crisis have continued to dwindle over time. 5. What appears to be the major constraint that the central banks used to determine the limits of the monetary injections into the economy? The US assumed a most proactive role in tackling the financial crisis.
The Federal Reserve has mainly applied interest rate changes to stop the financial crisis from having greater effects on the economy – more than any other central bank. The bank’s interest rate has been reduced from about 5.3% in September, 2007 to about 1.4% over the last couple of months (Senanayake, 2009). 6. Did the United States use the same or different criteria? Through this action, the bank has managed to shelve away worries related to high inflation rates. The US applied interest rate reduction, stimulus packages and a relaxed monetary policy like the other central banks albeit more proactively.
By lowering interest rates, the supply of money in the market got to increase thereby reducing inflation and panic in the market. 7. To what extent to do you agree/disagree with the actions of the central banks during this time? The central banks took the right measures in trying to solve the financial crisis. By lowering interest rates, the supply of money in the market got to increase thereby reducing inflation and panic in the market. A relaxed monetary policy is always relevant in the case of such crisis as the 2007-2008 financial crisis.
There are other interventions that some banks have also applied in this respect. Some of these measures include purchasing bonds and reducing reserves requirements. References Basu K. (2009) The Mechanics of Central Bank Intervention in Foreign Exchange Markets. New York. Department of Economics, Cornell University. Allen P. (2008) World in Action. Retrieved 23 October, 2011 http: //www. guardian. co. uk/business/interactive/2008/oct/21/creditcrunch Topnews (2011) Swiss Central Bank May Buy Foreign Currency to Influence Swiss Franc. Retrieved 23 October, 2011 http: //topnews. us/content/214132-swiss-central-bank-may-buy-foreign-currency-influence-swiss-franc Senanayake N. (2009) “Structured Finance and the 2007-2008 Financial Crisis - Causes, Consequences and Implications”.
Open Thesis. Spiegel (2008) European Central Bank Pumps €70 Billion into Market. Retrieved 23 October, 2011 http: //www. spiegel. de/international/business/0,1518,578540,00.html Morrison W. (2009) China and the Global Financial Crisis: Implications for the United States. Retrieved 23 October, 2011 http: //www. fas. org/sgp/crs/row/RS22984.pdf