Is there a Monetary Cause to the 2008 Financial Crisis? An Empirical Study on the US Monetary performance: 1989-2008

This article empirically examines the two decades (1989-2008) of monetary policy performance in the US. By using the federal fund rate as a measure of change in monetary policy, the study provides evidence that the Fed’s monetary policy could have generated a scenario inductive to housing bubble and shows that interest rate expectation is informative about the future movement of federal fund rate. The anticipated monetary policy should be one of the crucial reasons in causing monetary and financial instability in the US economy. The article concludes with a conjecture of a probable “interest rate trap” when a persistent and prolonged low interest rate regime would eventually lead to financial bubble