Question

Explain why open market operations were not effective at raising the Federal funds rate after the Great Recession.

Answer 1

Open market operations are the most useful tool of monetary policy in which the central bank enters the open market and buys government securities in order to increase money supply in the economy. This is done by increasing the amount of reserves with the banking system. federal reserve conducted open market purchase of government securities in great recession, however, banks and other depository institutions were not extending loans. They had just experienced the subprime loan crisis and they were reluctant to extend any loan considering the strong possibilities of default. The risk of loan generation was very high because of the home loan crisis and therefore even after the increase in the amount of banking reserves, banks were not using those excess reserves in loan generation.. due to this reason the federal funds rate was not decreased..