The article written by Athanasios Orphanides raises the issue of whether or not governments have too high expectation on monetary policy to achieve long-term goals which can only be accomplished “by the appropriate policy mix and the cooperation of other public institutions.” Orphanides focused on three major goals burdened on Central banks (CB) which are full employment, fiscal sustainability and financial stability; and developed his arguments using four typical economies, US, Japan, UK and Euro area. He claimed that especially after the GFC, monetary policy is compelled to achieve these goals which are beyond its traditional responsibility with the possible end result of compromising its independence and credibility, thus diminishing its effectiveness in achieving its primary goal of price stability.
Price stability by Inflation targeting (IT) was emphasised to be the only objective of CBs in the late 20th century as the multiple-objective approach failed to address many economies’ high inflation problem at that time. Orphanides stated that it is due to this single objective practice that allowed CBs to respond so flexibly and aggressively during the GFC in 2007, which helped the global economy to avoid another Great Depression. However, there was disappointing growth following the GFC, hence major CBs around the world introduced extremely low interest rates and generous liquidity provisions to tackle it, whereas governments were reluctant to adjust their policies after the crisis and abused monetary policy as it was understood to be ‘the only game in town’.
However, Orphanides pointed out that, factors behind “the lack of satisfactory growth in the aftermath of the GFC” are often outside the control of CBs. One of them is t...
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...stability; and by exploiting empirical evidences from four major economies to support his views. In my perspective, CB should pursuit to partner with the government to achieve the broad fiscal goals under the conditionality that the primary objective of price stability isn’t jeopardized in the medium run.
Works Cited
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Central Banking Newsdesk, Nov 16, 2012, ‘SNB’s Jordan warns against overburdening monetary policy’
Orphanides, A. 2013, 'Is Monetary Policy Overburdened?’, Federal Reserve Bank of Boston, Public Policy Discussion Papers, No.13-8, http://www.bostonfed.org/economic/ppdp/
The Economist, June 30, 2012, ‘Central banks: Don’t give up’
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies...
In the past, the system of monetary policy is based on the Classical Gold Standard. In the article, “Review of: European monetary union: Lessons from the classical gold standard”, Stanley W stated how the gold standard lasted from the periods of 1880 to 1913. In the beginning, central banks used interest rates to drive short term capital inflows, which avoided gold movements and made sure that the prices adjust relatively. However, this adjustment process didn’t work. The author then argued that long term international capital flows, migration, and differences in tariff barriers, also known as the “Three Pillars of the Classical Gold Standard”, contributes to the reason why developing countries were able to maintain their current account deficits until they could face the competition with the modernized countries. However, in accordance to the article “Interest rate interactions in the classical gold standard, 1880-1914: Was there any monetary independence?” by Bordo and Macdonald, the Classical Gold Standard is not a sustainable monetary system because it required some countries to be independent when monetary policy operates. This is especially conflicting in the modern day structure in which central banks need to use a targeting zone to achieve their purpose. In the modern era, quantitative easing (QE) is an unconventional type of monetary policy used by the Federal Reserve to respond to the deep recession. According to the article “Quantitative easing and Proposals for Reform of Monetary Policy Operations: by authors Scott and L.Randall, the impact of conducting QE on interest rates is lower long term yields when compared to the short term ones. As noted by authors Bora, Omar and Georges in their article “Financial Crisis and...
"Monetary Policy is the most significant function of the Fed; it is probably the most-used policy in macroeconomics" (Colander, 2004, p. 661). This paper will discuss and elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal Reserve, and the stated direction of recent monetary policy will also be discussed.
In conclusion, I believe it is important to be conscious of the fact that in order for monetary policy to succeed and be effective, it must be combined and intertwined with other economic policies such as fiscal policy and supply-side policies. Therefore, it is not possible to solely blame monetary policy for the current economic downturn nor would it be just to praise only monetary policy during the relatively calm and stable economic periods within the United Kingdom.
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Mishkin. F. C. (2009). The Financial Crisis and the Federal Reserve. NBER Macroeconomics Annual, 24, 495-508
Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) controlling money in the economy so as to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest so as to attain a set of objectives aiming towards growth and stability of the economy.
In Ackley's view, monetary policy is viewed as being a cautious effort by monetary authorities (C. B. N) to control or regulate the stock of money or credit conditions for the tenacity of achieving certain economic objective. One objective of monetary policy is the realization of the high rate of or full employment, this doesn’t suggest that there is zero unemployment since there is always an amount of friction due to voluntary or seasonal unemployment (Ackley, 1978).
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McCallum, Bennett T. "Crucial issues concerning central bank independence." Journal of Monetary Economics 39.1 (1997): 99-112.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
Smaghi, L. (2009, Aprl 28). Conventional And Unconventional Monetary Policy. Speech at the International Centre for Monetary and Banking Studies (ICMB), Geneva. Retrieved from http://www.bis.org/review/r090429e.pdf
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,