FLUCTUATING INTEREST RATES WILL CAUSE A FINANCIAL CRISIS IN FUTURE

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 1

FLUCTUATING INTEREST RATES WILL CAUSE A FINANCIAL CRISIS IN

FUTURE

By [Name]

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 2

never seen before. The world’s economy was facing a crisis that was triggered by quite a wide

array of issues that almost sank the world’s economy. According to various scholars, this crisis

was one of the biggest disasters since the great depression of 1929. Even though the Treasury

and the Federal Reserve applied a lot of measures to prevent it, it still occurred, an indicator that

of unemployment in the US was still more than 9% excluding some move the workers who

became discouraged from looking for jobs. What is worse is that various financial and economic

gurus, in recent years, have warned of impending recession in the near future. In fact, it is

predicted that the next financial crisis is only about 18 months. Given the various causes of

financial crises, what will cause the next financial crisis are the fluctuations in interest rates in

the economy in the US and other countries of the world since 2009.

which even a small change in interest rates can interact with the system’s cross border

scaffolding like a series of falling dominoes. Reinhart (2019, p.4) claims that modern financial

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 3

crises are often the result of long periods of stasis that most tend to forget, which, in fact, hide a

words, to monopolize the markets of highly indebted borrowers. The enduring fragility of the

financialized regime illustrates the way in which intended growth-oriented policies can, in fact,

succeed in cultivating instability. Other scholars, to include Tooze (2018), claim that that the

arrogance of defense policymakers most during periods of recovery make them the first to ignore

or not see the unseen. That the next financial crisis is anticipated and will most likely come from

a cocktail of carelessly managed rates and abundant liquidity is a given, and rests heavily in the

observations described above. Stability, constructed from the illusion of low rates, convinces the

government to implement lax reforms and compliant investors to sleepwalk into peril. What is

perceived as a stable financial system is one that is closest to collapse, which means that

predicting regain and order in interest-rate policy may be the only way to preserve global

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significantly “unintended” impacts. Bloom (2014, p. 158) observes that uncertainty shocks cause

the system. An “aider” system can assist particular systems to become easily adaptable and

dynamic to the refined functions. Uncoordinated communication from central banks has the

effect of damaging public trust, which in turn has the effect of increasing volatility. Reinhart and

Reinhart (2018, p. 87) restated the delineation of this subject, focusing on the issues of gaps in

the exposed monetary policies on the infectious effect of downturns that can be experienced

globally. The findings construct tendencies that indicate the focus of a monetary system and its

control emphasized on rate setting does not easily align with the expectations of other high

seems to rule the financial behaviors. Uncertainty prone investors should be controlled as the

trajectory of behavior of a system. In the increasing depth of complexity, these perceptions of the

economy, of crisis, or systems, have not absolutely changed or rest on a completely different set

of fundamentals. More is required in a mechanism to decode economic signals and emotions

which parallel the definition of monetary precision from the other pole level of the system.

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in which inflation was low, even with the expansion of the monetary supply, suggesting that the

unchecked manner concentrated asset inequality and the relative market distortion needed to

lower the asset appreciation rates. Reinhart (2019, p. 10) observes that unmatched speculation is

capital and productive investment that is bound to be unproductive to the economy. The and

unregulated economy prevents global sweating because the quarterly credit is not realigned and

thus the system is rotated within fluctuation. Therefore, low interest strategies that are reactive

are replaced with speculative strategies that are the optimal structure for stagnation.

Historical Background of Global Financial Crises

Recurrent financial crises have punctuated modern capitalism due to cycles of credit

expansion, speculative optimism, and misjudged policies. As Reinhart (2019, p. 5) points out,

most crises arise from a lack of oversight concerning financial innovation and deregulation. This

lack of oversight permits risk to accumulate invisibly across institutions, which allows crises to

persist. This historical continuity shows that crises are structural outcomes of economic systems

built on leverage and confidence, rather than anomalies. Wolfson (2017) discusses that history of

finance in the United States after the Second World War illustrated cycles of excessive

borrowing and painful deleveraging that followed. These cycles of boom and bust demonstrate

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the unresolvable conflict between the liberalization of markets and the stability of the financial

regulation remain unchanged.

Baumeister and Kilian (2016, p. 144), deepened these instabilities, recessions, and the economys

responsiveness to energy-financial shocks. There was a major economic crisis in the early 80s

that was the first big tell of a systematic failure of political cooperation in global finance.

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our interest rate policies are too volatile and our belief in our control over monetary policy is

overblown.

financial globalization. Capital markets were liberalized, and were thought to bring economic

development although in actuality it caused economic disease. To gain foreign direct investment,

emerging economies took on massive foreign currency-denominated debts which were harmful

as it made them vulnerable to depreciation. As Reinhart describes in his text, the Asian financial

crisis of 1997 highlighted the sudden stops phenomenon in the capital markets and serves as an

example of the dark side of capital markets. Caballero, Farhi and Gourinchas have observed in

financial globalization, which is the success of a nation makes it more vulnerable as well. This is

the trend which continues until this very day. The world today is more closely inter-connected,

which amplifies economic gains as well as risks, more so as localized shocks in the economy

aggravates the global credit system. The world has one lesson, which is the absence of

systemized coordination to financial openness, evokes a faux sense of security which is wiped

away once the investment sentiments are negative. This has been the order of the world.

reemerged with the global financial crisis of 2007-2008. Wolfson (2017) emphasizes that the

entire crisis was rooted in the risk-absorbing financial engineering of intricate mortgage-backed

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securities. Gilchrist et al. (2017, p. 789) illustrate a paradox in which rapid credit expansion was

finance had outstripped the conventional regulatory framework. According to Tooze (2018), the

crisis did more than shatter the trust in self-regulating markets; it also illuminated the need for

concerted action. The historical sequence is clear: regulatory negligence combined with credit

reduces the level of productive investment. Firms are reluctant to spend capital when the policies

are highly unpredictable. Summers (2014, p. 34) calls this scenario “secular stagnation,” where

the borrowing at low interest rates leads to inflation of financial assets but does not result in real

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2008 period is an example of how structural distortions can emerge from emergency policies in

an economy that is highly dependent on easy monetary policies.

of, economic distress. Kunze, Kramer and Rudschuck (2014, p. S48) contend that uncertain

predictions rates generate a clouded atmosphere and cause an irrational risk-taking behavior thus,

throwing a wrench in the investment planning process. Reinhart (2019, p. 11) further explains

that during periods of recovery, erratic policy rates generate false hopes which result in over-

optimism and over-lending. A disconnect between policy rates and economic performance,

oscillates between bursts and collapses, reminiscent of centuries past, only to be moderated by

prevailing financial rigidity and makes the distortion of self-correcting measures into policy

global economy. Tooze (2018) believes the collapse in 2008 accelerated the ceding of financial

supremacy in the West, leading to frameworks of greater pluralism, with emerging economies

taking on pivotal roles. Reinhart (2019, p. 12) highlights the fact that crises have almost always

led to changes in the structure of economic power, with the recovery phases benefitting those

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determines that the two forms of stablility, that being price and financial, are dependent on each

other. If a central bank focuses on one, they risk losing the other. Minsky 2015, suggests how

asset markets come to expect, “the easy credit dominator” and as a result, we see the creation of

fragile balance sheets. This reinforces the argument that behavior feedback mechanisms, rather

than solely inflation levels, should guide interest rate setting policies. Interest rate policies that

do not account for the speculative psychology in the equity and housing markets are more likely

to cause a complete economic collapse rather than economic growth.

response tends to conflict with empirical data. As Ajello et al. (2016, p. 14) elucidate, credit

booms which result from a drop in the benchmark rate, tend to increase banks’ liquidity risk

exposure. The longer the period before bank assets mature, the more this exposure increases. If,

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Demertzis (2019, p. 73) point out that there are some macro-prudential buffers such as interest

which posits that no social action escapes interdependent feedback. In the field of monetary

theory, it is all too easy to forget that policies are a response to the voters of a country. De la

Dehesa (2011) is most likely to point out that, borrowers, investors, and lenders all react to

interest rate changes asymmetrically. The cycle to which these subjects belong is not distant

from the amplification of instability, which politically is self-cancelling.

monetary policy. Carney (2015:221) termed this “the tragedy of the horizon,” where rate targets

for the short-term deny the reality of the climate threats for the long-term. These observations do

not simply reiterate the “decoupling” of environmental policy from financial policy. As Minsky

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presence of such instabilities, unless proactive measures are taken to address these changes. The

gives rise to.

resilience through distributional outcomes on consumption. The persistent low rates in South

Africa discriminate in favour of the owners of the assets and, thus, exacerbate wealth inequality

(Meyer, Chipeta, and Mc Camel 2018, p. 74). The inequality here reduces consumption and

lowers the rate of inclusive economic growth. According to the Smets (2018) article, more

Maintaining Control of Order suggests that to maintain society against the disruptive

consequences of economic resilience, equity needs to be included in macroeconomic policy.

Otherwise, deliberate efforts to stabilise the price level in a country may have the opposite effect

on the livelihoods of the citizens, and undermine what lies at the bottom of economic resilience.

economic modeling limitations. Guarata and Pagliacci (2017, p. 9) point out that traditional

models consider instable relationships between the rates and output even when there are frequent

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empirical link breakages. Ajello et al. (2016, p. 17) remark that when the system undergoes

the idea that uncertainty is not a break from the monetary system, but its very defining feature,

the rates may lead to capital outflows (Meyer, Chipeta, and Mc Camel, 2018, p. 76). These

instances highlight the policy trilemma, which consists of integration, autonomy, and stability.

Global interconnectedness suggests the necessity of hybrid frameworks, which combine

continuance of economic cycles of boom and bust.

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which rationally, give me positive and negative rate policy, will in a real economy and Interbank

bonds and a range of other financial transactions that will move the protected capital. The bank’s

capital of the system in which central banking flows act, adjust and the policy at each level in the

Interbank and the bond. And then will give reach cycle based and the real protected flow capital

to various spheres in real, the system and core mechanism which achieved flow capital which

block the positive base rate bank where and low bonds of that capital.

digitalization of the economy facilitates capital mobility and changes the channels through which

interest rates influence investment. According to Dafermos, Nikolaidi and Galanis (2018, p.

226), new green technologies will fundamentally change the credit demand and the underlying

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interest rate policy must evolve from a passive to a proactive policy instrument, shaping, instead

of just reacting to, the changes that will define global stability.

The Post-2008 Recovery and Monetary Policies

because it plunges the economy into recessions. On September 18, 2019, the US Federal Reserve

decided to cut the benchmark interest rates by as high as 0.25% which is the second time since

the 2008 recession (Borio & Gambacorta, 2017, p.218). The reason why this was done was to

financial crisis because when the interest6 rates becomes lower, the bond markets are impacted

because the yields on almost everything from the United States will become Treasuries to other

economic aspects such as corporate bonds will eventually become unattractive to the investors

because they will tend to fall (Claessens, Coleman & Donnelly, 2018, p.2). The result of this is

that it creates what is called the stock market rallies since the investors will be prompted to pull

their money out of the bonds and invest in stocks. This is likely to trigger a financial crisis

because the impatient investors will sell off their stock which will affect them when the crisis

ends because they will buy at higher prices.

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credit in the short term, but that it compresses bank profit margins in such a way that banks will

refrain from lending. This is economically explained by the fact that profit-maximizing banks

will create credit only to the extent it is economically viable and profitable to do. This profit

paradox is closely related to the explanation of Green and Lavery (2018, p. 83) who points out

the “monetary indiscipline” of overreliance of the government on the central bank. This leads to

the conclusion that the recovery from a financial crisis that relies only on monetary liquidity

instead of real structural reform is a postponed recovery.

interpretations of stability. Beck, Colciago, and Pfajfar (2014, p. 3) explain how financial

intermediaries unevenly transmit rate changes, which exacerbates sectoral imbalances. When

central banks provided the economy with a larger volume of reserves, banks shifted their funding

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stimulus was the result of plentiful credit and subdued demand. This suggests that the restoration

symbols.

interdependent systems, especially with respect to the global response to the financial crisis.

economy overlooked the global liquidity management issues. This repetition indicates the lack of

equilibrium due to the currency and capital flow policies of the country in recovery. To avoid the

beggar-thy-neighbour policy issues, there should be coordinated rate and fiscal policies. The

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diverting balances of potentially uncontrolled monetary instruments into speculative activities. It

seems recalcitrant distortion policies have rendered recovery efforts ineffective. In bearing

confidence of the banking system, the expansion of quantitative easing measures also transferred

systemic risks posed by banks to the less regulated shadow financial markets. Future policy

efforts hinge on analytical constructs that keep monetary policy support from becoming a

destabilizing influence. The gap left from uncovered risk appears from the broader question of

moral hazard that prolonged accommodation poses. Unquestioned permanent intervention,

assumed to be prolonged, will serve to rationalize the abandonment of the fragile measures of

expectation management in the post-crisis world. Sumner (2017, p. 98) argues that while this

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income or financial-stability benchmarks to achieve a better mix between growth and prudence.

closed off rational flexible excusability. Communication is required to rationally incomplete and

in Japan and the EU, energy price and market volatility conditions constrained the normalization

of monetary policies. This implies that the non-financial component of economic shocks during

the post-crisis period ultimately defined the consolidation of monetary policies post crisis. The

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that central banks are not only expected to provide “stability” and stop growth from boiling over

but also provide the stability necessary to promote the economy’s growth. Engen, Laubach and

Reifschneider (2015, p 12) also emphasize that the output gain from accommodative policies will

not be forever and will need to be recalibrated to stop the diminishing returns. This explains the

need to focus on the schedule of fundamental shifts. It is innovative and productivity rate shifts

that should be the focus of interest rate policy to ensure that economic stability is achieved

alongside necessary structural change to provide strong and inclusive economic growth.

the international financial system. In a globalized economy, even minor adjustments in U.S.

policy trigger responses in international capital markets. Aizenman, Binici and Hutchison (2014,

p. 2) claim that capital outflows from emerging markets in response to the 2013 tapering

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and provide a framework for global lending, investment, and currency arrangements. This

boundaries and functions continue to expand. Among the institution's most notable challenges

has been the balance between autonomy and accountability. Conti-Brown (2017, p. 9) claims that

enhanced public confidence. This implies that autonomy is strengthened by, and not undermined,

by transparency. Independence in the current era is not derived from isolation but the trust that

has been earned. Openness has now become one of the credibility tools of the Fed that

demonstrates that accountability and good governance are principles that must coexist.

emphasizes the psychological aspect of monetary policy. With the rapid flow of information,

expectations may determine outcomes even more than actions. Bauer and Rudebusch (2018, p. 6)

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explain how ambiguous or overly anticipatory policy communications may lead to market

right imbalance of clarity and flexibility in guidance to shape expectations while retaining the

would have expedited recovery from the global financial crisis. This illustrates the relevance of

the Institutional Framework. Conti-Brown (2017, p. 11) paradoxically states that "over-

coordination" and lack of policies aimed at fiscal stimulus and monetary expansion to control the

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banks do their work. There are new aspects of the digital economy which complicate the

calibration and the transmission of central banks policies. As Fernald (2014, p. 9) points out,

digital technology increases the productivity cycles and therefore weakens the link between the

interest rate and real output. It emphasizes the restructuring of the economy concerning the

responsiveness of the monetary system. As Kiley and Roberts (2017, p. 340) state, the traditional

mechanisms of transmission are modified by digital finance as well as non-bank credit providers.

This calls for new and, perhaps, more complex policy frameworks and the dynamism of real-

Global Monetary Policy Trends

In recent years, global monetary policy has been structured around long-term changes

rather than changes on a global cyclical basis. Financial crises have forced central banks to take a

new view on liquidity and reserves over the last century, and each crisis has taught institutions

valuable lessons on policy design (Reinhart, 2019, p. 4). Learning and adapting over each crisis

can be viewed as institutional learning. The addition of risk-adjusted forecasting methods aims at

predicting and controlling the uncertainty of the rate (Kunze, Kramer and Rudschuck, 2014, p.

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S48). This means predictive control has shifted to real-time toward more risk-averse policy

more rapidly than it can be dealt with when monetary policy is extreme.

complexity of the policy response. With the increase of capital mobility, the policy spillover of

monetary and fiscal policy interdependence as described by Reinhart (2019, p. 6) is blurring the

lines of domestic and external frameworks. Therefore, these structures suggest the necessity of

sustain intertemporal and cross sectional stability.

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momentum in the private sector. Monetarily, the system has moved into a state of stagnation,

where the temporary (default) monetary policy has shifted to a permanent position of monetary

“ease.” Kunze, Kramer, and Rudschuck (2014, p. S50) have also pointed out how “finish” rates

weakened market expectations. This has led to a situation where the signals of monetary policy

tightening are perceived as a bluff. It illustrates the paradox where the mechanisms of stability

breed fragility. From an analytical perspective, the global economy resembles a precarious

equilibrium, held together by liquidity and shrouded in confidence, that, when lost, could lead to

a catastrophic collapse.

Summers (2014, p. 32) argues that in developed economies, the increase in the proportion of

older people in the population reduces potential investments and lowers equilibrium interest

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of technological advances makes it more difficult for central banks to predict the demand cycle

collaboration amongst the global monetary authorities. Inter-regional financial crises transmit

with “virtual” instantaneity via the bonds and currencies markets due to the impetuses of

another necessitates pre-emptive frameworks in central bank relative to the inter- and intra-

central bank collaborative adoption of information frameworks. Overall, the global financial

system functions as one large adaptive system with interdependent stability. The currencies of

currencies of Resilience in the New World.

banks of sovereign nations. As Kunze, Kramer and Rudschuck (2014, 47) point out, on the one

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hand, the interconnectedness of financial systems makes it impossible for policymakers to

need for safe instruments and the 'risk-off' environment surrounding capital flight to reserve

currencies reinforces dependence on monetary policy of the central banks. Structurally, this is a

significant gap in global governance where the financial conditions of the majority of the world

inflation, as noted by Gilchrist et al. (2017, p. 793). This has led to the assumption that advanced

economies are experiencing weakened monetary transmission. Weaker monetary transmission

leads Summers (2014, p. 35) to characterize the remaining capital stagnation as deep structural

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crises avoidance marks a shift to a proactive approach to stability. Bloom (2014, p. 163) points

out that the management of uncertainty has become central to the avoidance of a self-fulfilling

spiral of decline. The globally integrated monetary policy signifies the emergence of new risk

and the management of the psychology of that risk. The modern central banker must now act as

an economist, as well as a strategist, to ensure confidence and financial order.

Global Interdependence and Policy Synchronization

control the economy of their respective countries. In doing this, it also controls the world’s

economy because each country’s central bank ensures that changes in interest rates are in

accordance with the international set standards that could help in avoiding changes that can harm

the global economy. According to Claessens, Coleman, and Donnelly, (2018, p.2) setting these

rates, normally ensure that they are held at low levels in the bid to cause a boom in the economy

after financial crises. However, Gourinchas and Rey (2016, p.34) posits that such changes bring

about interferences into the organic functioning of the financial markets as well as the economy,

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something that brings about innumerable serious consequences that include imbalances and

distortions.

view their sovereignty and their newly acquired economic territory. Globalization, in particular,

Lane (2017, p. 12) argues, has created an intricate network of economic interdependencies a

stream of interconnected national economies that function as a networked whole. This network

system highlights the increasing difficulty of independent policy implementation. Over the last

20 years, Ductor and Leiva-Leon (2016, p. 113) claim that the synchronization of business cycles

among the world’s major economies has worsened brought about by trade and cross-border

tend to show, that area economic policies ever more depend on cross-border policies too. More

than ever, the ability to bounce back economically is the outcome of a collective understanding

of mutual risks that a decline in one area is bound to bring about similar outcome on the rest.

policy transmission. Growing empirical evidence showcases the effects of market heightening

integration on the diffusion of shocks. Matesanz and Ortega (2014, p. 1838) show that during

financial crises, the exchange data of different countries exhibits powerful contagion where

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may relieve the economy from the stress of over-heating, but are more likely to induce severe

structural changes that increase future systemic risk.

world. The countries with bottom tier institutions suffer the most in these scenarios. Capital

flight and currency depreciation in emerging markets still emerging from the destabilizing

financial systems of their economies is a result of sudden policy reversals in advanced economies

which Agur and Demertzis (2019, p. 69) assert. This is a demonstration of how the rest of the

world suffers from the realignment of global monetary policy. Dafermos, Nikolaidi, and Galanis

(2018, p. 221) argue that investment in the more sustainable projects is a divestment rage in the

than just cyclic; there are also structural elements too. Managing the changes in rates is a global

issue needing coordination and other policy targets to be intertwined such as developmental and

environmental stability.

of rate can disrupt the balance of an economy Its the case when interest rates go up sharply and

speculative investments simply vanish. Kuttner and Shim (2016, p. 38) show that sudden shifts

in monetary policy contraction tend to disproportionally decrease demand in housing markets

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 49

with high leverage, and bring about price crashes in unison with defaults. Their work brings to

coordinated fashion to achieve desired stability. In a way, the housing market serves as a

composite measure of interest rate manipulation: the more abrupt the changes, the

disproportionate the contraction that spills over to construction, banking, and consumer spend,

financing and demand conditions become pronounced. Clearly, stasis itself becomes a resource.

As Sumner (2017, p. 95) contends, the rules of monetary control predicted tend to supply more

confidence to the long-term horizons of the economy than hands-on changes, even in recessions.

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interest, leads to a severe erosion of trust, which is the foundation of all financial systems.

instability and its ecological consequences. As Dafermos, Nikolaidi and Galanis (2018, p. 223)

put it, unstable monetary conditions increase environmental risks, because they inhibit longer-

term financing for green infrastructure and climate adaptation. The authors demonstrate how

monetary uncertainty translates into ecological vulnerability. The longer-term consequences of

climate change have been termed the tragedy of the horizon by Carney (2015, p 220), since it

policy to sustainable indicators rather than purely inflation indicators. Shifting the focus of

monetary policy to the longer-term structural elements of the economy is the next step. The

increasing overlap of financial and ecological stability has yielded the understanding that the

of growth and spending, is the governance of finance, growth, and planetary boundaries.

excessive overreactions followed by corrections. Policymakers tend to go back and forth

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between extremes which damages both credibility and long-term stability. Minsky (2015, p. 58)

policymaking that is overly knee-jerk in nature. Sumner (2017, p. 98) argues that the structural

rules of which are drawn in advance that are followed are more effective than measured changes

of policy in lessening such cyclical mistakes. His claim only serves to reemphasize the more

surpassing continuity of less creative reasoning. Looking at it from the analytic perspective, the

pattern illustrates that the interest rate policy is not a matter merely of setting the interest rates at

the right level, but having the self-control not to deploy erratic measures. Therefore, the stability

of global finance rests equally on the 'technical' and the 'institutional' in terms, respectively, of

policy design and discipline.

Heavy spending combined with high levels of government debt makes managing that

debt vital, as pointed out by Bernanke (2017, p. 12), who states that while spending to stimulate

demand is important, managing that debt “can undercut" a country’s credibility on a global scale.

Mohan and Kapur (2014, p. 7) point out that spanning the policy gap “above the zero lower

bound on interest rates” is highly restrictive “contradictory policy” that could lead to instability

in credit systems, and they argue that joint action by fiscal policy and central banks diminishes

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 52

the credit market contradictions. These works point to the interaction of fiscal policy and central

boundless implications to control the international market.

and exposure amid the speculative nature of recovery in the economy sustains the borrowing.

However, fiscal capacity becomes constricted. According to Sumner (2017, p. 95), the structured

rule of policy strategy improves fiscal predictability, which reduces the likelihood of excessive

fiscal deficits and private investment. This empirical observation captures the way in which

but also public investment which in turn diminishes the capacity that the government can use to

mitigate crises. This analysis captures the strategic political economy of public investment vis-a-

vis the paradox of austerity. In the analysis of the political economy of impact investment fiscal

confidence and counter-cyclicality.

them unique policies adapted to the specific conditions of the crisis, usually on the government

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side, the spending policies of the government, often deficit financed, that mitigate contractions of

argument of risk exposure. Mohan and Kapur (2014, p. 11) point out that coordination of

policies among the advanced economies is designed to avert any competitive distortions in

financing of debt and the value of currency. Their argument brings out the fiscal policy

collaboration aspect. Collectively, these studies imply fiscal governance over the world is

increasingly considered to be a public good that needs transparent, co-ordinated, innovative

policies to decide on the governance of borrowing to build resilience and stave down future

tendencies of instability.

paradox of debt that expands faster than productivity: the negative correlation between the two

phenomena. Government borrowing heavily and paying for the interest that comes with it can

drive up interest rates, thus restricting the availability of cheap money. Beck, Colciago and

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 54

macroeconomic management is unimaginably complex, with many psychological factors at play.

borrowing’s productive investment, more than competitive interest, must take center stage.

adjusted debt”, a shift to long term accountability. When it comes to long term planning,

Bernanke (2017, p. 25) states fiscal management of a major economy is misconstrued in a

manner that confidence shocks from the economy gets triggered and the entire fiscal systems

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 55

of the past and the obligations of tomorrow are in bondage. Detaching economic rationale is

diffused, the answer’s governance is amply endowed with none the less reason.

monetary policy. The persistence of low interest rates has changed some of the dynamics

associated with debt sustainability. Chodorow-Reich (2014, p. 8) illustrates how unconventional

monetary easing temporally lowers the costs of debt servicing, but may distort the fiscal

apparatus’ incentives towards excessive borrowing. This illustrates the moral hazard

consequences of an accommodative policy. Duarte (2019, p. 600) argues that the adoption of

fiscal structures resilient to low-rate environments helps avoid reliance on temporary monetary

one of the fundamentals of the economy today. The political and market disturbances perennially

challenge the sustainability of debt frameworks. Fang, Chen, Yu and Xiong (2018, p. 63)

illustrate that oil and stock market policy uncertainty diverges on long run correlation and hence

there is higher dislocation of assets, and greater correlation breakdown, in stressed fiscal

conditions. Their work illustrates the way in which markets are pulled together by the

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 56

expectations of fiscal policy. Green and Lavery (2018, p. 89) point out that in denial of growth

policy boundaries of in the 21st century, financing should be economic holistic the spending

while restraint. In fiscal policy, there has to be balance of innovative flexibility to deal with

predicaments of expectation in the global economy.

rates affect banks as well. It is because when the Central Banks change interest rates, banks,

despite their concerns have to adopt such measures. Kiley and Roberts (2017, p.318) states that

in 2012, for instance, the Federal Reserve reduced its deposit facility rate, which are the interest

rates that all the banks get when they receive when they deposit their money with the central

bank. As a result, Kiley and Roberts (2017, p.318), report that during this period the interest rate

was at 0% and other series of cuts followed leading to as low as -0.4% by 2016. These cuts were

intended to give monetary accommodations during the low inflation period as well as during

periods when economic growth was weak. Even though low-interest rates have the ability to

boost the economic growth, it has raised concerns due to the fact that it could lead to a reduction

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 57

of income from the assets that bear interest. It also leads to financial crises because it affects

countries. Continued drops in the monetary policy rates can “squeeze” the banks’ net interest

margins and thus forces bank to rethink their models and strategy. The ability of banks to set the

price of credit and the interest rate depends on the resources that the Federal Reserve has and the

directional policy. The weakening ability of the Federal Reserve to control the reserve balances

has the ability to “dull” the mechanisms of monetary policy. This even further complicates the

trading have the ability to adjust profit levels faster. The accommodation policy has led banks to

steer way from capital controls and have transitions to models of bold profit. This brings in the

highest level of exposure to recessions. The global financial crisis and the Federal Reserve

charge hitting income variability.

sometimes destructive effects. Banks tend to diversify and engage in speculative lending or fee-

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 64

and interest-rate policies, responsible banking actions, and self-sustained global coordination to

other end of the spectrum, reaches the soft band where the money is not disallowed, connect with

more silence during syncopated exposure of monetary governance. Finally, not all region

intentions are self-sufficient and all excess governance borders crossed are temporary soft phases

that only the controller of the Nation can with President's or the other type of his funds identify

as global payment deficits also feuds level. The analysis concludes, however, along the

innovation borders of the loops southern you set out the common turn region, blocked circuits,

reserve funds and counter systems have to run out of soft funding as credits that can be shielded

are more.

States but also to other countries across the world. For the various research findings contained in

this paper, it was clear that fluctuations in interest rates are a major cause of a future financial

Fluctuating Interest Rates Will Cause a Financial Crisis in Future 65

rate policies produce on the banks’ behavior, ensures that banks are able to maintain a reasonable

and useful net worth.

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