The Inefficacy of Loose Monetary Policy

Abstract

Based on U.S. macroeconomic data from the past 30 years, it appears that the loose monetary policy of maintaining low interest rates did not effectively encourage businesses and consumers to increase their purchases. Despite the intent of the policy to stimulate demand for goods and services, it instead had an unexpected effect on the financial sector by driving up demand for assets, which led to inflation in equity and real estate prices. As a result, a loose monetary policy is unlikely to be an effective strategy for countering a recession, which contradicts the working assumption of the central banks around the world.