Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
the impact of Monetary and fiscal policy
Monetary policy practice
the impact of Monetary and fiscal policy
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: the impact of Monetary and fiscal policy
INTRODUCTION
Since the 1990s, a large number of industrial countries and a growing number of emerging market and transition economies have adopted inflation targeting as their monetary policy strategy. During the implementation they face many challenges. However, there is no established pattern so countries must learn along the way from one another and more importantly from their own experience.
This paper provides an overview on inflation targeting as a monetary policy strategy, necessary preconditions for its successful implementation, its advantages and disadvantages and issues and challenges that emerging market and transition economies face while defining and implementing this monetary policy strategy.
Inflation targeting as a monetary policy strategy
Macroeconomic policy of any country has several goals such as employment, economic stability, economic development and production growth. Those goals are achieved by appropriate fiscal and monetary policy led by “most important players in financial markets” , Central Banks. Healthy macroeconomic policy means healthy economy which can be achieved through one of three monetary strategies: monetary targeting, inflation targeting and implicit nominal anchor. Central banks are held highly accountable for the conduct of monetary policy and hitting the targets. In other words, those regimes appear to be highly transparent. Furthermore, what is common for these three strategies is that all three of them focus on price stability, which is, for most Central Banks of the world, the main goal of monetary policy. Not so long ago policy makers reintroduced the idea of targeting. They first introduced monetary targeting during the seventies and eighties, and later on in 1989 infla...
... middle of paper ...
...//www2.gsb.columbia.edu/faculty/fmishkin/PDFpapers/w5893.pdf
• Mishkin, Frederic S. and Schmidt-Hebbel, K., 2006, “ Does Inflation Targeting Make a Difference?” Central Bank of Chile Working Papers No. 404 available from http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc404.pdf
• Johnson, D., 2002, “The Effect of Inflation Targeting on the Behavior of Expected Inflation: Evidence from an 11 Country Panel,” Journal of Monetary Economics 49, pp.1521-1538;
• Gerlach, S., 1999, “Who targets inflation explicitly?” European Economic Review 43, pp.1257-1277;
• Lin, S. and Ye, H., 2009, “Does inflation targeting make a difference in developing countries?” Journal of Development Economies 89, pp.118-123;
• Cukierman, A., 1996, The Economics of Central Banking, in: H. Wolf (ed.) Contemporary Economic Issues: Macroeconomic and Finance, Basingstoke, UK: Macmillan.
Metzler, Allan H. A History of the Federal Reserve, Vol I and II. University Press Books, 2002
Clark, Todd and Christian Garciga. "Recent Inflation Trends." Economic Trends (07482922), 14 Jan. 2016, pp. 5-11. EBSCOhost, cco.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=112325646&site=ehost-live.
The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward.
Mishkin. F. C. (2009). The Financial Crisis and the Federal Reserve. NBER Macroeconomics Annual, 24, 495-508
In chapter nine ‘Why is there an employment/inflation trade-off?’ the authors critique the natural rate theory. They agree with the fact that wage setting is influenced by expectations of inflation but disagree that inflationary expectation affects ‘wage and price setting one for one’
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 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).
Loungani, Prakash, and Nathan Sheets. "Central bank independence, inflation, and growth in transition economies." Journal of Money, Credit, and Banking (1997): 381-399.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress
Binhammer, H. H. & Peter S. Sephton. Money, Banking and the Financial System. Nelson, 2001.
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
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
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,
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.