How can monetary policy address the challenges of banking crises?
Above statement is adversely highlighted in the keynesian theory of demand and money. It is implicit , ' that rate of interest (i), is really the return on bonds. He assumes expected return on bonds are of two types- the internet payment the expected rate of capital gain Market value of bonds is invRead more
Above statement is adversely highlighted in the keynesian theory of demand and money. It is implicit , ‘ that rate of interest (i), is really the return on bonds.
He assumes expected return on bonds are of two types-
- the internet payment
- the expected rate of capital gain
Market value of bonds is inversely related to rate of interest. The investors compare the current interest rate with ‘normal’ or critical predetermined rates. If rate of current is high compared to normal rate they expect a rise in bond prices and fall in interest rates .
This leads to holding more of bonds as they can earn high returns on it and vice versa.
Therefore, if interest rate increases in near future, bond prices fall, wealth- holder may convert their cash balances into bonds at lower price and have capital gain.
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Monetary policy can play a crucial role in addressing banking crises through several instrument: 1. Interest Rate Adjustments: Central banks can lower interest rates to encourage borrowing and investment. Lower rates make it cheaper for banks to lend money, which can help stimulate economic activityRead more
Monetary policy can play a crucial role in addressing banking crises through several instrument:
1. Interest Rate Adjustments: Central banks can lower interest rates to encourage borrowing and investment. Lower rates make it cheaper for banks to lend money, which can help stimulate economic activity and improve liquidity in the banking system. This can alleviate pressure on banks facing solvency issues.
2. Providing Liquidity:- If banks are running low on cash because people are withdrawing their money, central banks can come forward and lend them money. This helps banks stay open and prevents panic among customers.
3. Buying Assets:- In serious situation, center banks can buy financial assets, which puts more money into the economy. This can help lower long-term interest rates and support the value of investments, making people feel more secure about their money.
4. Regulatory Measures: Alongside monetary policy, central banks can work with regulatory authorities to implement measures that strengthen the banking system. This may include increasing capital requirements, stress testing banks, and ensuring better risk management practices.
5. Communication and Forward Guidance: Central banks can communicate their plans and reassure the public that they will take steps to support the economy and blanking system. This can help calm fears and build confidence.
These measures, when effectively implemented, can help mitigate the impact of banking crises and support the overall stability of the financial system.
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