Financial Development In 1985 Essay

In 1985, the interest rates were lower and more stable than in other years. 1978 experienced lowest short-term interest rates while long-term interest rate declined to a rate that has never been seen since 1980. The real interest rates- nominal rates adjusted for inflation- were also lower in 1985 than other years though going by historical standards, they remained very high. From January to early march, both short-term rates and long-term rates rose moderately by yearly highs. This is partly because of the strong demand for business credit and the ending of a period during which the Federal Reserve eased the pressure on banks on their reserve positions. Interest rate declined by April and June. The factors behind interest rate ________________________________ 5. Douglas A. Irwin & Joseph H. Davis. â€Å"Trade Disruptions and America’s Early Industrialization,† (2003). NBER Working Papers 9944, National Bureau of Economic Research, Inc. demand for business loans. Another factor that contributed to the second quarter drop in interest rates was because of the cut in the Federal Reserve’s discount rate. After midyear, the short-term rate fluctuated in a narrow range, slightly above June lows. By early December, the U. S. Treasury bill rate was 7. 10 percent. This was about one percent lesser than that of 1984. The long-term interest rate also fluctuated in the third quarter; however, in the late of October, it dropped rapidly. The continued drop in long-term rate was because of the low rate of inflation, the signs that showed that the economy would remain sluggish and that monetary policies would not tighten. Interest rates in 1985 were more stable than the most recent years. The rate of fluctuations for short-term rates was within the range of one and one-half-percentage points in the year compared to the three percent points in 1984 and considerably less than 1980-1984 periods. The long-term rates were also stable in 1985 and the rate of fluctuations was between a narrow range that was less than two percentage points. Nominal rates and interest rates were low in 1985 but going by historical standards, there were high. Growths in Monetary Policy in 1985 The growth in monetary policies in 1985 was moderately higher than that of 1984. M1 grew faster than most recent years while M2 grew fastest than in 1984. The growth rate of M3 in 1985 was less than that of 1984. M1, known as money supply grew at an annual rate of 11. 6 percent for the first 11 months of 1985. This is more than twice the growth in 1984. The resurgence in the growth of demand deposit and a rebound in the growth of 6. Diebold, Francis X & Rudebusch, Glenn D, â€Å"Have Postwar Economic Fluctuations Been Stabilized? ,† September 1992. American Economic Review, American Economic Association, vol. 82(4), pages 993-1005. other checkable deposits caused the rapid growth. After exhibiting little growth on balance in the past five years, demand deposit grew to 8. 0 percent rate in the first 11 months of 1985. There was a sharp declination in M1’s turnover in 1985 just as it grew more rapidly than nominal GNP. M2 grew at an annual rate of 8. 6 percent in the first 11 months of 1985. This was somewhat more than that of 1984. In contrast to the growth of M1’s in 1985, M2’ growth was likened to the growth of 1980-1984 periods. Several other components in M2 grew rapidly in 1985 than in 1984. Savings deposit increased in 1985 after contrasting in 1984. Some of the 1985 growths may have come from the expense of small-time deposits. M3 slowed sharply in contrast to M1 and M2 in 1985. M3 grew at an annual rate off 8. 3 percent for the first 11 months of 1985. This is considerably less than that of any recent years. This slow growth was because of the declined growth in large denomination time deposits. Growth of term repurchase agreement and institution-only markets fund were slowed down in 1985. The growth of domestic non-financial debt also slowed in the first 11 months of 1985, growing at a rate of 12. 8 percent, which moderately low than that of 1984. This nonfinancial debt consists of outstanding debts of all governmental units, household, and nonfinancial businesses.