Monetary Policy and Economy

International Capital Movements In accordance to Milton Friedman, one of the downsides of activist monetary policy was the transmission of lengthy and variable lags. What is more, Friedman considered the effects of this monetary policy to be unpredictable. On the other hand, contemporary consensus is that the effective conduct of monetary policy ought to be done because of the perspective that the integrity of the central bank is essential and pivotal.

This is for the reason that solely methodical central bank behavior in line with an interpretable imperative that exemplifies a dedication to price stability can offer a dependable security for private sector prospects. The article by Mishra et al. (2012) examines the manner in which the different conventional channels of monetary transmission are expected to operate in the financial setting that is disposed to portray low-income countries. The emphasis of the article lies on the impact of the financial market structure on monetary transmission. In totality, Mishra et al.

(2012) indicate that the weak structure of institutions that is largely perceived in low-income countries has a diminishing impact on the role that security markets play. As a result, the customary monetary transmission via market interest rates and market-oriented asset prices end up being weak or absent. What is more, this causes the exchange rate channel of monetary transmission to be destabilized by substantial central bank intervention in the foreign exchange market.

One of the strengths of this article is that it considers all the various elements required in an institutional set up for monetary transmission. Through a process of elimination, the authors make a determination that the bank lending channel continues to be the most general idea and means for monetary transmission in low income countries. In turn, the study undertakes evidence across nations regarding the effectiveness of different phases in the bank lending channel in nations at various levels of income.

Another strong suit of the article is that it encompasses an extensive VAR-based empirical literature that delves into the influences of monetary policy inventions in a majority of individual low income countries. This makes it possible to delineate that an environment in which domestic monetary policy is weak and undependable is one in which the central bank should confine activist urges (Mishra et al., 2012).

In addition, the article is properly outlined and the information provided by the authors is in good flow, which makes it much easier for the audience to follow and understand. However, the article does have its shortcomings. One of the limitations of the studies is that the authors fail to delineate what should be a typical or characteristic monetary transmission in a low-income country.

In addition, the article makes a substantial assumption that for majority of the nations, the framework instituted fails to have an independent central bank or have markets that are well-functioning and highly liquid (Mishra et al., 2012). The recommendation made for future research encompasses the examination of whether conducting discretionary monetary policy in low-income countries will have a positive impact. This is to take into consideration whether it will give rise to the desired inflation targets, the selected exchange rate administrations and also the desired constraints to the capital account.

The article by Hogan (2012) examines both conventional and unconventional monetary policies and the manner in which these policies were implemented to tame the financial crisis. In particular, during the course of the 2008 financial crisis, the Federal Reserve implemented unconventional policies that perchance help in recuperating the financial system and ensuring there was no collapse or disintegration. However, the article also points out that these policies might have given rise to extensive concerns for several years to come (Hogan, 2012).

One of the key strengths of this article is that it delineates the entirety of the financial crisis, ranging from its background, its causes and consequences and also the aftermath of the financial crisis. This makes it much easier for the audience to follow the process and as a result have a clear understanding of the impact of the monetary policy, not only its prospective influence prior to the crisis and in the course of the crisis, but also the forthcoming periods subsequent to the crisis (Hogan, 2012).

In addition, to a certain extent on top of accomplishing its decrees to promote economic growth and uphold stable prices, the Fed made credits to particular financial institutions, acknowledged up till then ineligible security, and acquired bonds that massively inflated its balance sheet and generated exceptional levels of excess bank reserves. The strong suit of the article is that it outlines how these events happened and their prospective significances (Hogan, 2012).

Another strength of the article takes into account the proper illustration of elements linked to monetary policy, for instance the balance sheet composition of the Federal Reserve, net interest outlays and also the market rates set by the Fed. This makes it possible for the audience to have a clear indication of the impact of the monetary policy implementation between the years 2008 and 2011.

The article by Adam (2012) examines whether owing to the outcome of these economic turmoil, the implementation of the monetary policy means the need for a far-reaching change, or simply reconsidering aspects regarding the key structure of the monetary policy strategy. As a result, the fundamental element considered is the future of the monetary policy and its association with financial stability. As pointed out, monetary policy can have an influence on financial stability whereas macro prudential policies to stimulate financial stability will have an influence on monetary policy.

If these macro prudential policies are executed to constrict a credit bubble, they will give rise to a sluggish credit growth and will hamper the growth rate of aggregate demand. Monetary policy may need to be easier so as to counterbalance weaker aggregate demand. On the other hand, if policy rates are sustained to a low level to stimulate the economy, then there is a bigger risk that a credit bubble might take place.

In turn, this may necessitate tighter macro prudential policies to make certain that a credit bubble does not embark. This gives rise to the importance of the synchronization of monetary and macro prudential policies when all three objectives of stability in finance, output, and price are to be followed (Adam, 2012). One of the key strengths of the article is that it clears up the debate on the aspect that monetary policy had a part to play and helped in causing a bubble in the house prices in the U.S.

and therefore a source of the financial crisis. Centered on the behavior of the monetary policy tool, the Fed policy was instrumental in generating the economic boom and bust. In the midst of the recession in 2001, the monetary policy became expansive. Between 2001 and 2005, the Fed amplified its assets of securities by forty five percent, with an increase of about eight percent every year on average. The lagged effect of increasing liquidity instigated an increase in current dollar spending at yearly rates of approximately seven percent between the years 2003 and 2006.

By 2005, the excess liquidity generated by the purchases of securities by the Fed had generated a speculative boom with fast rising prices (Genetski, 2014). Adam (2012) is keen on pointing out that the financial crisis was caused by factors that barely had anything to do with monetary policy. It was rather as a result of contextual macro conditions, biased and misleading incentives in financial markets, regulatory and supervisory letdowns, and information issues. One of the limitations of the article is that it does not have a distinctive or clear conclusion.

Therefore, this can leave the audience in a confused state. The author does not give a conclusion on the influence of monetary policy but rather states that there is a significant need for a key reconsidering of information concerning the main structure of the monetary policy strategy but does not specify what.

Influence of Optimal Monetary Policy on the Global Financial Crisis In definition, a monetary policy can be defined as one of the public interventionist measures aimed at influencing the level and pattern of economic activity so as to achieve certain desired goals. A monetary policy can be said to cover all actions by the central bank and the government which influence the quantity, cost and availability of money and credit in the economy.

Specifically, a monetary policy works on two principle economic variables, that is, the aggregate supply of money in circulation and the level of interest rates (Mankiw, 2014). The classical model is an alternative monetary model of the manner in which the monetary policy influences the economy. This particular model makes the supposition that the monetary authorities of the Federal Reserve are considerable and significant. According to Genetski (2014), in the first decade of this present century, the United States experienced a speculative economic boom and also an economic financial bust.

Centered on the behavior of the monetary policy tool, the Fed policy was instrumental in generating the economic boom and bust. In the midst of the recession in 2001, the monetary policy became expansive During a financial crisis, the market economy becomes exposed to a detrimental feedback circle that encompasses capital outflows, devaluing exchange rates,.