Unconventional monetary policies and their impact on the economy Essay

Unconventional monetary policies and their impact on the economy - Essay Example Funding the affected financial institutions resolves this by empowering the banks to lend and the advanced amount can then be invested in the economy towards growth. The policy also ensures stability of financial institutions when the institutions’ liquid base becomes insufficient for operations and therefore improves flow of money despite existing interest rates (International Monetary Fund, 2013). Aggressive liquidity provision defines advancement of finances to financial institutions as a backstop in order to mitigate adverse risks or ultimate failure of financial institutions. Rational run off and lost confidence in financial institutions are some of the concerns that aggressive liquidity provision prevents and both financial institutions and intermediaries are beneficiaries. The policy empowers banks and facilitates lending roles. This then promotes circulation of money and investments into economic growth and strong balance sheets of financial institutions and intermediaries for confidence in the institutions (International Monetary Fund, 2013). This involves operations for strengthening the environment in which financial institutions operates. The policy aims at ensuring stability of asset prices and the institutions’ ability and willingness to lend through elimination of risks. One of the ways of extending support is through purchase of private assets. Assets are used as security for borrowings and their value determine risks in lending as well as lending costs. Assets that securitize mortgages and other loans offer example of the role of the policy. Lost value in the assets means inability of financial institutions to recover their money in cases of default, with subsequent effects of reduced liquidity and triggered stiff measures for lending. High asset values, when the asset is used as security, however, guarantee ability to recover lent