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All the concerns regarding the potential financial stability risks that are posed by the asset management industry have increased to the great level recently. In particular the bond funds have been grown very importantly. The funds have invested in less liquid assets. The impacts of the assets purchase are elaborated using the monthly data in the situation when the zero lower bound data was binding. Assets purchase had vital impact on the GDP and also on the inflation in the countries. The effect of announcements of large scale purchases of government bonds on CPI and real GDP in the United Kingdom and United Strategic had shown fro Bayesian VAR. The financial sector is facing drastic changes. However many changes are positive and are made intentionally for the good. In order to understand the individual factor in a better way it is important to take a look at the monetary policy and its effects. The European Central bank policy is considered as the reason the problems that are currently going on in the financial and banking sector. By putting focus on the causes of our actions on can easily understand the way to get back to the normalisation of the monetary policy.

There are reasons for the low rate of interest. The growth trend has been declining in the mature economies for the several decades. There are many kind of the reason for this. The main reason for the same is that the slow down in growth has led to the lower interest rate for long-term. In such circumstances there is the risk of self reinforcing downward spiral as such developments do not go unnoticed. If any type of the company expects demand to fall then it will be less inclined to make big investment. The ageing societies in mature economies have to adjust with the shrinking labour force. They need to save more. This results in saving gluts and also to the shortage of the safe assets. The investments are falling and on the other hand the savings are getting raised. The dynamic has led to the reduction in the natural rate of interest. The natural rate of the interest plays a very important and vital role in the monetary policy. In case the key interest rate is less than natural rate then monetary policy has the stimulating effect on the economy. It is because it encourages investment and consumption. On the other hand when key rates are more than the natural rates this results in dampening of the demands and due to which the price raises. In the current environment ECB has taken the market rate below the level of the natural rate. The key rate since March in this year has been zero. The constant nominal interest rate would have resulted in to the higher real interest rate. In this way the risk of deflation gets increased. The interest cannot be lowered to an extent that is unlimited. It becomes more attractive for the participants of the market.

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This article has been written by KJ Singh a MBA Graduate from a prestigious Business School In India
Article Published:January 29, 2019

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