The monetary policy involves all the actions of the central bank on the economy of any country. The monetary affect the growth of a country. The monetary policy also has an influence on the interest rate of a specific country. It is a regulatory measure by the central bank. This paper will critically look on the monetary policy and economic models that are applied to make the monetary policy successful.
There are certain goals of the monetary policy that have been developed over time. The goals were developed by Federal Reserve act. These goals are; promotion of price stability, ensuring that there is full employment in the economy and stability of interest rates. The policies have been effective for many countries during the times of recession and inflation. When the prices are stable, the standards of livings for people are improved and there is economic growth and better living standards. In the long run, price stability is able to achieve employment and sustainable growth of the economy (Mishkin, 2007).
The monetary policy also plays an effective role in financial stability and good performance of the economy of a country. This is put into action by preventing any disruptions of the county in the financial sector. The policy ensures that the financial sector remains effective through the use of specific control measures established. The financial systems are interdependent in any country and the use of this policy ensures coordination of the central bank and other commercial banks in making the economy stable. The Federal Reserve ensures that the financial systems do not experience any external shocks (Mankiw,2005).
The Essay on Country’s economy
These are goods that cannot be provided by the private sector but are very essential to the development of a country’s economy. They are usually very expensive undertakings with fewer returns or take a long time for the investors to recoup their money back. This makes them to be less attractive to the private sector investors who are mainly driven by the profit motive and would thus be unwilling ...
The monetary policy affects the economy of a country in various ways. This is done by a linkage between the policy and the balances that are held by the Federal Reserve banks. The depository institutions in the economy have opened accounts at their Reserve banks. The depository institutions keep on trading these balances that are in the Reserve banks. The Federal Reserve exercises its control to influence supply and demand of balances in the reserve banks (Bofinger,2001).
There are certain tools of the monetary policy that make this policy effective. One of the tools is creation of the money by the banks. Money is printed by the central banks of a country but the commercial banks create credit that is available to all the interested parties. Credit is created from the balances that have been deposited by other people and the banks get income inform of interest charged. The amount that the bank can lend depends on the reserve ratio. The reserve ratio is set by the central bank. The reserve ratio is the amount of money that must be kept by the bank in an account opened I central bank. This amount cannot be given as credit. The bank must keep this amount for the purpose of those who make withdrawals. It the banks create credit with all the deposits it means that those who have accounts cannot make withdrawals (Mankiw,2005).
The discount rate is another tool of the monetary policy. This is the amount that is charged to the financial institutions by the Federal Reserve. The central bank charges other financial institutions in form of the discount rate. The discount rate affects the amount of interest rates that will be charged by these institutions. If the discount rate is high, the interest rate charged by the central banks also becomes higher. The central bank controls money supply by using the discount rate. The discount rates depend with the current situation of the country. When the central bank wants to increase money supply in an economy, the discount rate is set at a low level (Walsh, 2010).
When the discount rate is low the financial institutions lower the interest rates that they charge their customers. The customers are able to get loans easily from the financial institutions at the low rates. It the central bank wants to lower the money supply in a country, the discount rate is increased. With a higher discount rate, the banks increase the interest rate. Many people will not borrow from the banks because of the high interest rates (Bofinger,2001).
The Essay on Exchange Rate Currency Interest European
Chaos in The Currency Markets: Currency Crisis of The EMS 1. What does the crisis of September 1992 tell you about the relative abilities of currency markets and national governments to influence exchange rates? The currency markets and national governments both have abilities to influence exchange rates. Like other financial markets, foreign exchange markets react to any news that may have a ...
Open market operations is another effective tool of the monetary policy. Open market operations involve buying and selling of government securities. The value of the securities depends on the interest rates. According to Keynesian theory, there is an inverse relationship between the prices of the securities and the interest rates. The prices of the bonds are high when the interest rates are low. When the central banks want to increase money supply, the central bank buys securities that are held by people. People sell their securities to the central bank and get money in return. This increases money supply and most of the people in the economy hold larger balances (Mishkin, 2007).
When the central bank wants to lower the amount of interest rates, the central banks buys the securities from the public. The securities are sold at a price that is higher. The higher selling price of the security induces the public to sell the securities. Open market operations is the most effective tool of the monetary policy. This tool is applied in many countries and it has yielded positive results. This tool has been very effective in controlling inflation in many countries. Most of the leading economies in the world implement this tool to date. Research has shown that the countries that lag behind in using this tool face difficulties during inflation (Fisher, 2005).
The central bank also limits the amount of overnight borrowing to the commercial banks. Overnight borrowing refers to specific amount of balances that are borrowed by commercial banks. The central bank either limits overnight borrowing or prevents the commercial bank from borrowing over a specified time. This helps to control money supply in the economy of a country in the time that is specified.
The Essay on Foreign Policy And National Security
President Harry Truman was determined to avoid what he regarded as the errors of the American past: military weakness and a reluctance to get involved in international problems. Thus, Truman could be expected to protest Soviet expansion in Eastern Europe. He did so adopting a policy of "toughness" in his dealings with Moscow. He was however not eager to provoke another war. The Truman Doctrine was ...
A lot of care should be taken in implementation of the monetary policy. It is important for relevant authorities to keenly look on the effects of the monetary policy before the implementation of the monetary policy. The policy should be implemented in time. It is also important to consider the fiscal policy being implemented to ensure that the fiscal policy and the monetary policies maintain the same objective. The two policies have the same goals and different strategies are used in the implementation of the two. The fiscal policy is mainly controlled by the government but the monetary policy is in the hands of the central bank (Walsh, 2010).
A question is raised about the perfect time of implementation of the monetary policy. The first step in implementation of this policy is identifying the magnitude that the policies can control. The monetary authority should consider the current interest rates and the level of unemployment in the economy. The monetary policy cannot change the current situation of the interest rates and employment all over a sudden. It is a gradual process and a series of actions have to be done to make it successful (Mankiw, 2005).
The monetary policy experiences some limitations. One limitation is that the monetary policy is not the sole controller of prices, interest rate and the level of employment. There are other factors that affect aggregate demand and supply in the economy. When looking on the demand side, the government can lower the taxes and this can change the spending habits of businesses and households. It may take time for the monetary policy to offset the changes that are in the demand side of the economy (Walsh, 2010).
In conclusion, monetary policy is an effective way of controlling the level of inflation in a country. This is a policy that was first implemented in United States during recession in 1920s and has remained effective. It is essential for many economies to integrate this policy to solve various discomforts in the economy. The tools of monetary policy should be used to ensure that the overall effect of monetary policy is fruitful. With the monetary policy, the macroeconomic goals are easily achieved.
The Essay on Monetary Policy and the Economy
Using the tools of monetary policy, the Federal Reserve can affect the volume of money and credit and their price?interest rates. In this way, it influences employment, output, and the general level of prices. THE FEDERAL RESERVE ACT LAYS OUT the goals of monetary policy. It specifies that, in conducting monetary policy, the Federal Reserve System and the Federal Open Market Committee should seek ...
References
Mankiw, N. G. (1997).
Monetary policy. Chicago: University of Chicago Press.
Bofinger, P., Reischle, J., & Schächter, A. (2001).
Monetary policy: Goals, institutions, strategies, and instruments. Oxford [u.a.: Oxford Univ. Press.
Mishkin, F. S. (2007).
Monetary policy strategy. Cambridge, Mass. [u.a.: MIT Press.
Fisher, D. (2005).
Monetary policy. New York: Wiley.
Walsh, C. E. (2010).
Monetary theory and policy. Cambridge, Mass: MIT Press.
