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There are two different opinions on why the interest rate in early 2000s was low. The first argument, saving glut, was held by former FED
There are two different opinions on why the interest rate in early 2000s was low. The first argument, saving glut, was held by former FED chair Ben Bernanke. He thought that at that time global savings increased significantly, duo to the high saving rates in some developing countries, like Korea and China. This will lead to the supply curve of loanable funds moving right, which will cause the final interest rate to go down. The second viewpoint was proposed by John Taylor. He thought that the Federal Reserve should be responsible for this. He said that FED intentionally kept the low interest rates for too long. According to Taylor Rule, the interest rate should be higher when the inflation is higher or the GDP growth is too high. However, at early 2000s, the FED didn't follow Taylor Rule, and set the interest rate lower than it suggested. From my perspective, the Federal Reserve's policy contributes more to the financial crisis. Suppose that the FED set a higher interest rate, people would not be that willing and easy to borrow money from banks, thus reducing the overpricing of houses and other assets. The saving glut just provided more money and speeded
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