Question

Briefly explain the risks and uncertainties associated with the unconventional monetary policy?

Answer 1

''When central bank look beyond their traditional tools of interest rates,monetory policy takes an unconventional turn"

#Monetory policy instruments are usually used to uplift economic growth of economy through reducing repo rate ,but when ,there is already lower rate ic interest ,the central govt. has to redort to such policy instrument ,which lower the rate of interest without changing repo rate, here comes the ----- unconventional monetory policy.,it was named as QE( Quantitative Easing )

#It happened in US when after the financial crisis of 2007-08 ,,the US federal Reserve adopted tjis policy to bring down the overall interest rates in order to boost the economy.

#Under this policy ,the govt ,and private firms issued bonds to Fed.with the high demand of these bonds ,the interest rates also fell by lowering down the borrowing cost.It didn' t use repo rate to lower down rate of interest.

RISK AND UNCERTAINTIES ASSOCIATED -------:

1) The risk of hyper inflation --- when inrest rates were lowered down through bond purchase by central bank,it caused a speculative bubble..A speculative bubble is a condition where by prices increase too quickly.It leafs to risk of out of control inflation.

2) Risk of liquidity trap ----- It is a situation ,when the govt lowers the rate of interest for a prolonged period of time ,.As the rate of interest was already low ,it comes near to zero. All this ,leads to risk of liquity trap.

3) No long term effect --- The effects of unconventional monetary policy are visible after a long period.ususally it takes months or years.

4)Not effective to solve problems of a specific region or area.

5) Fear of budget deficit -- when spending is high ,taxes are low for a long period of time, a dangerous deficit is likely to erge...