Targeting of Key Interest Rate as a Source of Crisis

Abstract

In response to the world economic crisis of 2008 the authorities of many countries have launched policies of interest rate reduction through large-scale asset purchases on the open market. The paper provides an efficiency analysis of these programs as implemented in the USA, the Eurozone and the UK. It also studies the positive and negative effects of artificial key rate targeting. The author explains how changes of the federal funds rate increased bank interest rate risk and provoked the recession of 2007-2009. The results of this paper show that key interest rate adjustment can be harmful for the whole economy, and especially for depository institutions.

Keywords: Interest Rate Targeting, Crisis, Interest Rate Risk, Federal Funds Rate, Bank