Overview

In scope of this book, moral hazard problem relating to monetary policies during and after financial crisis is analyzed. First, an insight into the monetary policy objectives and tools are given. This is followed by the challenges which central banks face during financial crisis situations and their relation to moral hazard. It is proven that loose monetary policies during financial crisis might help in overcoming problems such as illiquidity in short term whereas it creates moral hazard among the market participants. This contributes to distraction of financial stability, an increase in inflation, and thus impedes economic activity in long term. These findings are also analyzed within two financial crises of the last two decades: dot-com bubble and sub-prime crisis. Evidence is provided that Fed's loose monetary policy and low interest rates has created moral hazard and encouraged market participants to take excessive risks that led to sub- prime crisis.

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9783639177497

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