Introduction
In this essay we will be looking at how the “housing bubble” greatly affected the market during the 2008 crash. The build up from 2002-2006 is a key subject when discussing monetary policy and the housing market. Furthermore, there are many attributing factors that increased the housing bubble during this time frame, including: applying the Taylor rule, monetary policy, housing market sectors, and short-term low interest rates.
The Taylor (1993) Rule, which forecasts interest rates based on nominal interest and actual interest equates the inflation rates. The Taylor rule suggest how the central bank should deal with inflation by lowering or increasing interest to stabilize inflation in the long run. The recommended real interest rate should be 1.5x higher than that of the inflation rate. (Brian Twomey) A revised version of the Taylor rule (1999) places a higher weight on inflation effectively lowering the policy compared to the 1993 version.
Raising or lowering interest rates will affect:
• Unemployment Rates
• Real GDP
• Inflation
Using simple rules such as the Taylor rule has guided policymaking on measuring inflation, predicting, and deciding what current interest rate …show more content…
After the 2001 recession the Federal Reserve System took action to lower interest rates, drastically from 6.50 percent in 2000, to 1.75 percent in 2001, by June 2003 the rates were at 1.00 percent. Standard predictions on short-term interest were above what the actual interest was; thus, the housing bubble grew indirectly with aid from the Fed. (Robert Gordon 2009) An increased demand for MBS (Mortgage-Backed Securities) from investors mixed with low interest rates allowed borrowers to borrow more money for initial payment options. (Obstfeld and Rogoff 2009) With all these factors in place, purchasing power for houses was indeed very
In this essay we will be looking at how the “housing bubble” greatly affected the market during the 2008 crash. The build up from 2002-2006 is a key subject when discussing monetary policy and the housing market. Furthermore, there are many attributing factors that increased the housing bubble during this time frame, including: applying the Taylor rule, monetary policy, housing market sectors, and short-term low interest rates.
The Taylor (1993) Rule, which forecasts interest rates based on nominal interest and actual interest equates the inflation rates. The Taylor rule suggest how the central bank should deal with inflation by lowering or increasing interest to stabilize inflation in the long run. The recommended real interest rate should be 1.5x higher than that of the inflation rate. (Brian Twomey) A revised version of the Taylor rule (1999) places a higher weight on inflation effectively lowering the policy compared to the 1993 version.
Raising or lowering interest rates will affect:
• Unemployment Rates
• Real GDP
• Inflation
Using simple rules such as the Taylor rule has guided policymaking on measuring inflation, predicting, and deciding what current interest rate …show more content…
After the 2001 recession the Federal Reserve System took action to lower interest rates, drastically from 6.50 percent in 2000, to 1.75 percent in 2001, by June 2003 the rates were at 1.00 percent. Standard predictions on short-term interest were above what the actual interest was; thus, the housing bubble grew indirectly with aid from the Fed. (Robert Gordon 2009) An increased demand for MBS (Mortgage-Backed Securities) from investors mixed with low interest rates allowed borrowers to borrow more money for initial payment options. (Obstfeld and Rogoff 2009) With all these factors in place, purchasing power for houses was indeed very