I am trying to understand the affect of interest rates during recession vs boom periods.
During a recession the central bank may try to increase the money supply by buying up securities at market prices. This would lead to decrease in short term interest rates as the banks make loans using the excess money supply gained from the cash paid by the central bank. Given this increase in money supply, the households may also purchase securities in order to reduce their money holdings. This effectively raises security prices and a decrease in interest rates, and initiate to warm up a recession.
The continuation of the above scenario where security prices keep going up (as long as households/businesses are willing to reduce their money holdings) may lead to a bubble or prices of securities at unreasonable heights (irrational exuberance?). This is when the central bank may step up and sell securities to reduce the money supply, which in theory will increase interest rates. This has the opposite effect as the money supply will decrease, and households/businesses will sell their securities in order to free up the money holdings. A capitulation may occur at this point. This would effectively cool down a hot economy.
And this cycle continues depending on many other economic factors/indicators.
Can someone please help validate the above. And any viewpoints you can share would be great.
Thanks.作者: pogo 时间: 2011-7-13 15:40
Well from this write up I can tell that you have your macroecon concepts pretty much nailed. As far as curriculum-based knowledge is concerned, you're quite fluent.
However, I feel that you're being a little too simplistic in relating changes in interest rates to asset price bubbles. But, this knowledge really isn't required to do well on the exam.
Best of luck!作者: dcfox83 时间: 2011-7-13 15:40
Thanks Beat The CFA for the confirmation.
Yes, I too feel that I am being too simplistic - but I hope to substantiate the deltas between the interest rates and the bubbles with some level of sophistication in the coming months. All the better if I can support this from a pragmatic point of view - not just theory.
BTW, out of curiosity at what level of CFA are you currently stuyding for. And are you working in the industry. No problems if you feel uncomfortable with the answers.
Thanks again.作者: JPSem 时间: 2011-7-13 15:40
Sujan,
I am already a charterholder. I tutor CFA students and manage wealth for private clients.作者: cyber21 时间: 2011-7-13 15:40
beatthecfa, this is great to know you already hold the charter!
Are you tutoring L2 candidates too? What is your location?
Edited 1 time(s). Last edit at Thursday, September 10, 2009 at 04:48AM by rus1bus.
