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: leadcfa 时间: 2013-4-7 04:31
Sujan,
I am already a charterholder. I tutor CFA students and manage wealth for private clients.作者: economicz 时间: 2013-4-7 04:33
Awesome…and thanks for taking the time to answer our queries much appreciated!
Cheers.
