The federal funds rate effect on subprime mortgage crisis management: An ARDL approach

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Abstract

This research empirically investigated the effectiveness of the interest rate policy of the Federal Reserve (Fed) on managing the subprime mortgage crisis. The study employed the autoregressive distributed lag model (ARDL) to analyze the stability of the Fed’s monetary policy, thereby providing an alternative analysis tool. Correlation analysis results showed a strong positive and statistically significant relationship between Fed funds rate and the labor market, a strong negative and statistically significant relationship between Fed funds rate and the housing market, and a strong negative and statistically significant relationship between Fed funds rate and price stability. In contrast, results of the ARDL model bounds test for cointegration indicated that house price index (HPI), labor market, and price stability were cointegrated, hence exhibiting a long-run relationship with Fed funds rate. This research demonstrates that additional empirical studies using new techniques are required to reevaluate the Fisher effect and expand the understanding of the mechanism between interest rates and inflation. This issue is extremely important, particularly for countries such as the U.S., the UK adapting inflation targeting policy using interest rates as an operational target.

Keywords: Subprime Mortgage Crisis, FED, Fed Fund Rate, Interest Rate Policy, Monetary Policy, ARDL

Authors’ individual contribution: Conceptualization — M.E.A. and A.A.Q.; Formal Analysis — M.E.A., A.A.Q., and A.B.-M.; Investigation — A.B.-M. and M.E.A.; Software — A.B.-M. and M.E.A.; Methodology — A.B.-M., M.E.A., and D.P.; Validation — A.A.Q., M.E.A., and D.P.; Writing — Original Draft — M.E.A., A.A.Q., D.P., and A.B.-M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: E31, J6, E40

Received: 24.02.2021
Accepted: 11.05.2021
Published online: 14.05.2021

How to cite this paper: AboElsoud, M. E., Al Qudah, A., Paparas, D., & Bani-Mustafa, A. (2021). The federal funds rate effect on subprime mortgage crisis management: An ARDL approach [Special issue]. Journal of Governance & Regulation, 10(2), 226–237. https://doi.org/10.22495/jgrv10i2siart4