The Impact Of Financial Crisis On The Global Economy Essay

1338 Words Nov 16th, 2015 null Page
In 2007 the world witnessed a downturn in the global economy so severe it is said to have been the worst recession since the Great Depression. The US stock market plummeted: the Dow Jones Industrial Average fell over 50% after its peak in October of 2007, and by March 2009 it had dipped as low as 6,600 points. Northern Rock, one of England’s largest banks, became the first in over 100 years to suffer from a bank run (they were denied a buyout by Lloyd’s Bank, leading to their nationalization. For a disturbance of this magnitude to occur in the world economy, a plethora of significant mistakes had to transpire. At the forefront of the financial crisis was the loose monetary policy taken on by central banks, with an imbalance of international money distribution and a housing bubble waiting to burst adding more weight to the problems that would drag the world economy down.
The period leading up to the recession of 2007 was called “The Great Moderation,” primarily because it was characterized by years of low inflation; the real rate of interest, which is calculated by subtracting the rate of inflation from the nominal rate of inflation, was said to have been negative for nearly 40% of the decade following the dot-com crash. Based on a study conducted by John B. Taylor, the growth of the real federal funds rate from the years of 2001 to 2007 should have been rising at a steady rate of approximately one percent per year if the Federal Reserve had followed the same policy it did…

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