On the Liquidity Shocks,Monetary Policy Mistake and the Financial Crisis
CHANG Zhongze
In the paper the author suggest that:(1)Liquidity shocks make a notable impact on financial markets through balance sheet channel and asset price channel.The balance sheet effects of borrowers cause the loss spiral and the margin spiral,leading to the fire sale of assets,this promotes large price drops and a general tightening of lending.(2) The monetary policy mistake,financial market structural changes,the new Bretton Woods system and the herd behavior of investors led up to the housing bubble,The shattered housing bubble was the trigger of the US financial crisis.(3) After the breakout of the financial crisis,the Federal Reserve injected liquidity to the financial market by adjusting the balance sheet,effectively reducing the probability of the financial market collapse.Finally,the paper makes reflection of the US.financial crisis from the angle of liquidity management in conclusion.
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