The Great Recession epitomizes a period of extraordinary financial stress. The emergence and ignition of the financial crisis of 2007-2008 scarred the US economy and spilled over financial stress to the global economy. Unemployment peaked to dangerous levels, banks that were deemed ‘too big to fail’ crashed, and default on loans became a norm. Although the proximate cause of the crisis was the turning point in the housing market and an associated rise in misconducts of subprime mortgages, the underlying factors which led to its emergence also include the accelerating rise of credit prior to its occurrence, declines in underwriting standards, diminished lending oversight, low compensation for risk-taking, and the reliance on complex instruments that proved fragile under stress. These inefficiencies resulted in extreme losses for many financial institutions who found their capital eroded and balance sheets plagued by illiquid assets with uncertain prices.
Conventional monetary policy tools were not enough to mitigate the adversities of the crisis, accordingly monetary policy in the US had to transform. In order to prevent the exacerbation of the financial situation, namely deflation and economic depression, the Federal Reserve turned to unconventional policy tools that go beyond influencing interest rates in money markets. This was especially necessary as short-term rates reached the zero lower bound. These tools entailed an expansion of the Fed’s balance sheet to historic levels through massive purchases of agency debt, mortgage-backed securities, and long-term government bonds which increased the Fed’s assets from $882 billion in December 2007 to $4.473 trillion in the first quarter of 2017. The Fed’s target was to ease credit markets of financial stress and reduce term premia, thereby committing to its sacred dual mandate – ensuring price stability and full employment.
US monetary policy yields substantial international spillovers, especially to partially dollarized emerging market economies that have a fixed exchange rate regime, such as Lebanon. Given that the Lebanese economy is characterized by partial dollarization – in deposits, loans, and transactions – and pegs its currency to the US dollar, monetary policy in the US can affect Lebanon through several channels. […]
For the full report, kindly follow the link: The Effects of US Monetary Policy on the Lebanese Economy