Tasked with analyzing the United States' monetary policies between 2002 and 2006, it is clear that the surge in demand for homeownership, which saw borrowers acquire homes that they could not afford, contributed heavily to the real estate bubble, leading to significant financial concerns. However, J. Dokko et al. (2009) argue that other factors were also at play and that the United States' monetary policy was one of them. This paper examines the various factors that contributed to the early 2000s' financial crisis, including low rates, loose versus tight monetary policies, the Taylor Rule, policy assessment, and outcomes, cheap credit, and economic simulation models.

Low Rates and High Demand for Housing

The relationship between interest rates and home buying activity is critical, but J. Dokko et al. (2009) argue that it was not enough to explain the increase in home prices. Low rates created more affordable financing options, which led to an increase in the number of people buying and selling homes.

Loose versus Tight Monetary Policy

A central bank can implement expansionary and contractionary monetary policies to lower or increase interest rates and borrowing in the economy, as per Lumen Learning (n.d.). The authors highlight that some central banks' rates are lower than what Taylor's rule would imply.

The Taylor Rule

The Taylor rule uses the GDP and inflation rates to calculate interest rates following the Federal Reserve's operating goals and the Taylor Rule economic model. The authors argue that many central banks followed their guidelines, which resulted in rates lower than the model predicted.

Effectiveness of Monetary Policy

J. Dokko et al. (2009) argue that there is limited evidence that US monetary policy significantly contributed to the housing boom, and that its impact on housing prices and demand was minimal.

Timing of the Housing Boom

The onset of the housing boom can be attributed to various events, but most people place it around 1998. Following the 2001 recession, housing appreciation increased significantly after 2002.

Economic Simulation Models

Computer models for economic simulation are available, but they are not perfect representations of reality. The expansion of account deficits was unlikely to have resulted from monetary policy. Furthermore, past economic models could not predict the 2008 global currency crisis with accuracy.

Reference

Dokko, J., Doyle, B., Kiley, M., Kim, J., Sherlund, S., Sim, J., & Van den Heuvel, S. (2009, December 22). Monetary Policy and the Housing Bubble. Federal Reserve Board. Retrieved November 24, 2021, from https://www.federalreserve.gov/pubs/feds/2009/200949/200949pap.pdf

Lumen Learning. (n.d.). Macroeconomics [deprecated]. Lumen. Retrieved September 15, 2021, from https://courses.lumenlearning.com/macroeconomics/chapter/monetary-policy-and-economic-outcomes/.