Monetary policy backfires in financial crises, worsening economic downturn.
Monetary policy plays a crucial role after a financial crisis. When there's a shortage of funds for businesses, cutting interest rates usually helps the economy grow. But during a crisis, this can backfire. Lowering interest rates can lead to a drop in the value of the country's currency, making it harder for businesses to borrow money. This can make it even more difficult for them to pay off debts in foreign currencies. So, in times of crisis, traditional monetary policy might not work as expected and could even make things worse.