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In the United States, the Federal eserve system is charged with implementing monetary policy (Investopedia, 2013). Monetary policy is essentially any the output of any central bank that seeks to manage an economy by means of manipulating the supply of money in the economy (Investopedia, 2013). The Federal eserve (2013) defines monetary policy as what it does to "influence the amount of money and credit in the U.S. economy." Thus, monetary policy affects not only the quantity of money but the cost of money and these factors directly affect the broader market with respect to investment, manufacturing output and overall economic activity.
The Federal eserve uses monetary policy for three main purposes. The first is to management the GDP, the second is to manage inflation and the third is to manage unemployment. The Fed seeks to strike a balance between these three objectives with its policy, and the…
Federal Reserve. (2013). Monetary policy basics. Federal Reserve Education. Retrieved December 11, 2013 from http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/
Gavin, W. (2012). What is potential GDP and why does it matter? Federal Reserve Bank of St. Louis. Retrieved December 12, 2013 from http://research.stlouisfed.org/publications/es/article/9228
Investopedia. (2013). Definition of monetary policy. Investopedia. Retrieved December 11, 2013 from http://www.investopedia.com/terms/m/monetarypolicy.asp
Simpson, T. (2005). The Federal Reserve System: Purposes & Functions. Federal Reserve Retrieved December 11, 2013 from http://www.federalreserve.gov/pf/pdf/pf_1.pdf#page=4
Every economic activity in the United States is related to the policies that are decided by the monetary policies of the nation that are formulated. This involves all activities like purchase of houses, starting up of new business enterprises, and expansion of businesses, investments in new plants or machinery. It also affects our investment decisions like putting our investments in banks, bonds, or the stock market. It is also well-known that the United States is the biggest economy of the world, and this causes its economy to have affects on them, and thus any decision about the monetary policy of the United States will also have an effect on them. The purpose of any monetary policy in any country is to correct the then present shortcomings of the economy like the situations of inflation or deflation, economic output and finally the most important of them all - employment.…
How does monetary policy affect the economy?" Available at http://www.frbsf.org/publications/federalreserve/monetary/affect.html . Internet; Accessed 09 December, 2003
Sazton, Jin. "International Dimensions to U.S. Monetary Policy," Joint Economic Committee Study, August 2000 Available at http://www.house.gov/jec/fed/intern.htm . Internet; Accessed 09 December, 2003
The Goals of U.S. Monetary Policy" FRBSF Economic Letter, 99-04; January 29, 1999 Available at http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-04.html . Internet; Accessed 09 December, 2003
U.S. Monetary Policy: An Introduction" Available at http://www.frbsf.org/publications/federalreserve/monetary/Internet; Accessed 09 December, 2003
" (EC, 2007)
Operational efficiency is held to be the most important of all the principles of operation for the EC and can be defined as "the capacity of the operational framework to enable monetary policy decision to feed through as precisely and as fast as possible to short-term money market rates. These in turn, through the monetary policy transmission mechanism, affect the price level." (EC, 2007) Equal treatment and harmonization is a principle that holds that credit institutions must be treated equally regardless of their size or their location in the euro area. Simplicity and transparency are said to "ensure the intentions behind monetary policy operations are correctly understood. The principle of continuity aims at avoiding major changes in instruments and procedures, so that central banks and their counterparties can draw on experience when participating in monetary policy operations. The principle of safety requires that the Eurosystem's financial and…
Monetary Policy Transparency: Lessons from Germany and the Eurozone' by Iris Biefang-Frisancho Mariscal and Peter Howells was presented at the RES Annual Conference at the University of Nottingham on Tuesday 22 March.
Blinder, a.S., (2000), "Critical issues for modern major central bankers," in European Central Bank and Center for Financial Studies (eds.) Modern monetary policy-making under uncertainty, pp. 64-74.
Brainard, W., (1967), "Uncertainty and the effectiveness of policy," American Economic Review, Papers and Proceedings 57, pp. 411-425. Sack, B., (1998), "Uncertainty, learning and gradual monetary policy," FEDS Working Paper 1998-34. Board of Governors of the Federal Reserve System.
Communicating Monetary Policy to Financial Markets (2007) ECB Monthly Bulletin April 2007.
Any change in the central back policy or the bank reserves, which is made to influence the interest rates and thus the investment, employment or production, is called the monetary policy. If the monetary authority wants to increase production, they need to increase the bank reserves. The bank then expands the money supply, which in turn reduces the interest rates. Monetary policy is one of the tools that a national Government uses to influence the economy. In alignment with its political objectives, it uses its authority to control the supply and availability of money to further impact its desired level of economic activity. The policy is usually done by the Central ank of the country.
The monetary policy has undergone a change from past days to now. The modern central banking especially in the U.S. comes after the post-depression era. The 1930's Government led by the economist John…
Monetary Policy. Retrieved at http://www.finpipe.com/monpol.htm Accessed on April 22, 2004
King, Mervyn. Convergence between the theory and practice of monetary policy over the past decade. Address to the joint luncheon of the American Economic Association and the American Finance Association, Boston Marriott Hotel, 7 January 2000 Retrieved at http://www.bankofengland.co.uk/speeches/speech67.htm . Accessed on April 22, 2004
The Impact of monetary policy on people. Reserve Bank of New Zealand. May 1997 Retrieved at http://www.rbnz.govt.nz/monpol/about/0092822.html . Accessed on April 22, 2004
Advisers - Monetary Policy. Retrieved at http://www.bized.ac.uk/virtual/economy/policy/advisors/monetary.htm Accessed on April 22, 2004
Monetary policy is crucial to the economy and impacts all types of economic and financial decisions individuals make. For example, depending on the state of the economy, individuals may decide whether to obtain a loan to purchase a new car or house or to start their own company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market. Since the United States is the largest economy in the world, its monetary policy also has significant economic and financial effects on foreign countries.
This paper analyzes and examines various issues related to monetary policy. First, the state of the United States economy is discussed. Next, the issue of whether the Federal Reserve is more concerned about high inflation or the possibility of a recession or other issues is analyzed. Lastly, this paper outlines…
Board of Governors of the Federal Reserve System." Retrieved at http://www.federalreserve.govon October 1, 2002.
Federal Reserve Board: Speeches and Testimony." Retrieved at http://www.federalreserve.gov/s-t.htm . On October 1, 2002.
FRB: Monetary Policy Report to the Congress." Retrieved at http://www.federalreserve.gov/boarddocts/hhon October 1, 2002.
U.S. Monetary Policy: An Introduction." Retrieved at http://www.frbsf.org/publications/federalreserve/monetary/affect.html on October 1, 2002.
Monetary Policy and Mortgages
The businesses of mortgages lead to their own problems. ecently it was stated by the attorney for the Western District of Missouri that the owner of a mortgage invest company and three employees of Ameriquest Mortgage were charged with an indictment. The effort made by them was to cheat Ameriquest and some investors through the process of false loans for mortgage. Brent Michael Barber who is 40 years of age is the owner of Somerset Homes and Investment Company as also previous owner of The Beef Pit, a Grandview, Mo., restaurant, along with Chauncey Joseph Calvert, aged 34, Avonda Lynn Nicodemus, aged 32, and oderick Neil Criss, 33, all former employees Ameriquest in Gladstone, Mo., were named in a 62-count indictment given by a federal grand jury in Kansas City. The main accusation was that these individuals had planned to cheat Ameriquest and other investors from…
Annaly Mortgage management, INC Code of Business Conduct and Ethics. Retrieved from http://www.annaly.com/corpgov/cofbce.html Accessed on 2 June, 2005
Benson, Richard. The Federal Reserve's policy: Punish Savers and Rob the Retired. February 24, 2004. Retrieved from http://www.321gold.com/editorials/benson/benson022404.html Accessed on 2 June, 2005
Estrella, Artura. Securitization and the Efficacy of Monetary Policy. Economic Policy Review. May, 2002. Volume 8, Number: 1. Retrieved from http://www.ny.frb.org/research/epr/02v08n1/0205estr/0205estr.html Accessed on 2 June, 2005
Independent Assessment key to Credibility of Economic Policy. 10 January 2005. Retrieved from http://www.libdems.org.uk/economy/feature.html?id=8045 Accessed on 2 June, 2005
Monetary Policy and the Federal Reserve
The Federal Reserve ("the Fed") is responsible for formulating and implementing the nation's monetary policy. Monetary policy is government actions to increase or decrease the money supply and change banking requirements and interest rates in order to influence spending by altering banker's willingness to make loans. An expansionary monetary policy increases the money supply in an effort to cut the cost of borrowing, which encourages business decision makers to make new investments, in turn stimulating employment and economic growth. A restrictive monetary policy reduces the money supply to curb rising prices, over expansion, and concerns about overly rapid growth (Kurtz).
The Federal Open Market Committee (FOMC) is the Fed's main agency for monetary policy making. All national banks must be members of this system and keep some percentage of their checking and savings funds on deposit at the Fed. In order to regulate the…
Greider, William. "The Federal Reserve Turns Left." Nation, Vol. 294, Issue 18, 30 April 2012:15-21. EBSCO. Web. 17 February 2013.
Hill, Andrew T., and William C. Wood. "It's Not Your Mother and Father's Monetary Policy Anymore: The Federal Reserve and Financial Relief." Social Education Vol. 75, Issue 2, March/April 2011:76-81. EBSCO. Web. 17 February 2013.
Kurtz, David L. Contemporary Business, 13th ed. Hoboken, NJ: John Wiley & Sons Inc., 2010. Print.
White, Lawence H. "Federal Reserve Policy and the Housing Bubble." CATO Journal, Vol. 29, Issue 1, Winter 2009:115-125. EBSCO. Web. 17 February 2013.
While this represents a significant portion of the government's operating income, higher inflation would generate even more seigniorage by requiring larger volumes (or simply higher denominations) of currency in circulation. If prevailing annualized inflation rises above 4.6% but remains below 9.0%, real seigniorage could climb to $130 billion, or about 6% of all federal receipts in a year like 2009 (U.S. Financial anagement Budget).
In itself, cash carries an interest rate of zero and no central bank can reduce its rate targets below that level. This is the pernicious "liquidity trap" that the Open arket Committee has sought to avoid by guiding U.S. overnight rates close to zero while avoiding a formal move to that level (Svensson). Obviously, once nominal rates have dropped to zero, no further easing is possible, requiring monetary authorities to employ a different set of policy instruments.
any of these instruments are effective to the extent…
Discuss some of the major determinants of the demand for money by sector and in total. Discuss some differences in the demand for money which might exist for countries other than the U.S.
An effective formulation of the Monetary Policy depends on the determining factors of the demand for money. Money Demand acts as a channel on transmission mechanism for monetary policy. Therefore the consistency of the money demand function is crucial for the monetary policy for attaining predictable effects on inflation and real output. The classical economists regard money as a numeraire, i.e. A commodity, the unit of which is used to represent the prices and values; keeping its own value unaffected by such a role. Money is assumed to be neutral having no tangible economic consequences. This is done by limiting the role of money as a store of value having the assumption of perfect information…
"Eco 223 - Finance and the Economy -6 Credit" Retrieved from http://homepages.uel.ac.uk/K.Bain/creditL.htm Accessed on 30 July, 2005
"Fiscal and Monetary Policy Process" Retrieved from http://www.econedlink.org/lessons/index.cfm?lesson=EM352
Accessed on 3 August 2005
Ghosh, Parikshit; Mookherjee, Dilip; Ray, Debraj. (December, 1999) "Credit Rationing in Developing Countries: An Overview of the Theory" Retrieved from http://www.econ.nyu.edu/user/debraj/Papers/Gmr.pdf Accessed on 30 July, 2005
If energy prices rise further, it is likely that private spending will be influenced and economic expansion may be negatively affected. The high and volatile prices of crude oil and natural gas appear troublesome for future predictions (Greenspan, 2005).
nother uncertain factor affecting the economy is productivity, which is delineated in unit labor costs, or the hourly labor compensation to output per hour ratio. n increase in productivity over the last decade has favorably influenced the United States' economy, in that efficiency gains restrained inflation. The concern is however that this rapid growth in productivity cannot be maintained. This inherent uncertainty is substantiated by the fact that output per hour, that reached its peak in 2003, seems to be declining. This may result in recession trends, although the duration of the productivity decline is uncertain. related concern is the sharp decline of output measured from the product side of national…
Although certain uncertainty factors do exist, the general trend is fairly stable, without major threats of either recession or inflation.
Greenspan, Alan. (2005). "FRB: Testimony, Greenspan -- Monetary Policy Report to the Congress, U.S. House of Representatives-July 20, 2005"
hen interest rates are low, people have a greater incentive to borrow and to spend money. That new car or home they have been 'putting off,' seems much more attractive when the interest rate is nearly zero! But perhaps "the most effective tool the Fed has, and the one it uses most often, is the buying and selling of government securities in its open market operations. Government securities include treasury bonds, notes, and bills. The Fed buys securities when it wants to increase the flow of money and credit, and sells securities when it wants to reduce the flow" (Obringer 2009, p.10).
Given the magnitude of the current economic crisis, the Fed has been taking aggressive actions with the specific aim of stimulating consumer spending, and hopefully production and employment to meet increased demand as a result: "The target fed funds rate will be below .25%…effectively at zero. The Fed…
Kliewer, Myron. (1997, Aug). The purpose of money. World invisible.
Retrieved June 14, 2009 at http://www.worldinvisible.com/newsltr/yr1997/aug/9708fina.htm
Obringer, Lee Anne. (2009). How the Fed works. How Stuff Works.
Retrieved June 14, 2009 at http://money.howstuffworks.com/fed.htm
Focused on cutting interest rates in order to obstruct economic decline and to prevent the destructive incursion of inflation, the Federal Reserve has acted independently (though with the administration's endorsement) to counteract mild or regressive growth patterns. After several years of sluggish economic performance and a response on the part of the Federal Reserve by way of a consistent reduction in interest rates, a number of factors have conspired to produce market bust. Precipitated at its base by an irresponsible level of homeowner loaning at a subprime rate, the market's current condition is one of marked pressure upon banks to collect on debts which a great many owners cannot afford to resolve.
As a result, the last six months have seen a tumultuous unfolding of market events, with the housing economy taking the biggest hit. ith few buyers in the possession of real assets and banks now wary to lend…
Amadeo, K. (2008). Economy Lost 1.9 Million Jobs Since Recession Began. About the U.S. Economy. Online at http://useconomy.about.com/b/2008/12/08/economy-lost-19-million-jobs-since-recession-began.htm
Associated Press (AP). (2002). Text of Statement on Interest Rate Policy. The New York Times. Online at http://query.nytimes.com/gst/fullpage.html?res=9C06E3DA143AF932A25751C1A9649C8B63
Brinsley, John. (2008). Volcker says Fed's Be ar loan stretches legal power. Bloomberg. Online at http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c&refer=home
Faux, Jeff. (2002). Take Back the Tax Cut. Economic Policy Institute Journal, Winter, 2002. Online at http://www.epinet.org/printer.cfm?id=980&content_type=2
In the attached resource files, there is a chart that outlines three perspectives on how the economy should be run: the mainstream macroeconomics perspective, the monetarism perspective and the rational expectation perspective. Which one of these approaches do you most agree with? What in Macroeconomics supports your point-of-view?
The view that makes the most sense is the rational expectation perspective. The reason why, is because this will take into account a number of real world factors that will have an impact upon economic growth. The most notable include: the private economy is stable when you are at the natural unemployment rate, there can be unexpected shocks to aggregate demand / aggregate supply over the short-term, cost push inflation is fueled by the lack of growth in the money supply and changes in monetary policy will have little impact upon inflation over the short-term. (Summary of Macroeconomic Views)
"Study Finds National Debt Tipping Point" Science Daily, 2010. Web. 2 May 2011.
Summary of Macroeconomic Views, n.
Amadeo, Kimberly. "How the U.S. Federal Debt and Deficit Differ." About.com, 2011. Web. 2 May 2011
Lanman, Scott. "Fed to Buy Extra $600 Billion." Bloomberg, 2010. Web. 2 May 2011
In the face of global credit crisis, it is expected that Fed has to make further changes such as cut in the more important federal funds rate to maintain stability. The pattern of growth is likely to change showing a slow down. "Mark Zandi, chief economist at Moody's Economy.com, has trimmed his forecast to show economic growth of about 2.5% in the current quarter, down sharply from 4% in the April-June quarter. He said the fourth quarter is likely to be even weaker at around 1.5%" ('Fed surprises markets with half-point rate cut', 2007). The policies of rate-cutting could be more disturbing because of warnings about inflation at a time of slowing growth. The turmoil in the credit markets is not likely to be reduced overnight. The changes might be observed after a while however not without some of the negative repercussion. A lot also depends on the…
Abel, a. & Bernanke, B. (1998). Macroeconomics. Addison Wesley Publishing. Third Edition.
Fed surprises markets with half-point rate cut', (2007), Retrieved on September 22, 2007 at http://www.msnbc.msn.com/id/3032222/
Crutsinger, M. (2007). Analysis: Fed rate cut encourages market. Retrieved on September 22, 2007 at http://www.boston.com/news
In 2006, the Federal Open Market Committee announced in a press release that it was raising its target for the federal funds rate to 4-3/4%, specifically warning of the dire threat posed by inflation. However, this only occurred after many years of historically low interest rates, designed to stimulate the American economy after the recession of 2001. The Fed's low rates, critics contend, were one of the primary reasons for the housing bubble and bust. With the benefit of hindsight, they state that the Fed should have never have allowed interest rates to sink so low, and should have raised rates to more normative levels far sooner than it did. This would have curtailed the American consumer's addiction to credit and stifled the spiraling housing bubble. But the Fed alone is not to blame: the Securities and Exchange Commission (SCC) and regulators did not exercise appropriate watchfulness over the complicated…
Amadeo, Kimberly. (2009). The Federal funds rate and how it works. U.S. Economy.
Retrieved November 14, 2009 at http://useconomy.about.com/od/criticalssues/tp/Current_Fed_Interest_Rates.htm
Press release. (2006, March 28). Federal Reserve. Retrieved November 14, 2009 at http://www.federalreserve.gov/newsevents/press/monetary/20060328a.htm
Deutsche Bundesbank in the period leading up to and following reunification. he paper explores the bank's monetary policies and considers their effectiveness in achieving the Bundesbank's stated goals of maintaining price stability in the German economy. he paper also discusses the role of credibility in advancing the Bundesbank's monetary policies.
Created by the Deutsche Bundesbank Act of July 26, 1957, the German central banks' mission was to achieve price stability. he Bundesbank steered the German economy through the expected collapse of the Bretton Woods system of fixed exchange rates, at its heyday from 1959 through 1968 (Garber, 1993). When Bretton Woods ended in March 1973, the transition to floating exchange rates gave the Bundesbank new scope for controlling domestic monetary conditions. his change opened up new opportunities for monetary policy, to which Bundesbank responded by pioneering the use of pre-announced annual growth targets for the money stock (Issing, 2005). During…
The Bundesbank pursued its mandate of safeguarding the currency through periods of inflation, recession and oil crisis over the next decade and a half. It was not until the reunification process started to take shape that a series of unprecedented challenges developed. As part of the reunification, the process of monetary union required that a conversion rate be established between the West German Deutschmark and the East German Mark. Fundamental differences existed between the Bundesbank and the West German government on two key issues: the pace at which the monetary union should proceed and the conversion rate between currencies (Morys, 2003).
The Bundesbank favored a gradual step-by-step approach to economic convergence to allow for time to enhance economic conditions in East Germany. However, their views were in conflict with those of the West German government, which wanted to expedite introducing the Deutschmark into East Germany as soon as possible. The Bundesbank, more concerned with the currency's stability, favored a conversion rate that would not cause inflation. Because of their concern for potentially inflationary consequences, the German central bank initially rejected the conversion rate suggested by the West German government, sparking a contentious and public conflict that lasted for several months (Morys, 2003).
The Bundesbank believed that the weak East German currency was symptomatic of an economy plagued by low productivity levels, no free competition or price mechanism, and no concept of private ownership. Consequently they did not believe that monetary union would solve these problems. Most economists agreed with the Bundesbank that a
The two-year time period that will be covered in from the middle of 2002 to the middle of 2004. Starting with Q3 in 2002, the GDP figures during this time period were as follows:
This data shows that the economy was facing conditions of accelerating growth during this time period. The economy was improving relatively slowly during the latter stages of 2002 and into Q1 2003, but after that the growth began to accelerate. The trailing 12-months' growth rate was over 4% for Q4 2003 and the first half of 2004. Thus, the economy was in a period of robust growth, strong enough that there may have been inflationary pressures. The inflation rate during this period was as follows:
BEA. (2014). Gross domestic product. Bureau of Economic Analysis. Retrieved December 5, 2014 from http://www.bea.gov/national/index.htm#gdp
BLS (2014). . Archived consumer price index detailed report information. Bureau of Labor Statistics. Retrieved December 5, 2014 from http://www.bls.gov/cpi/cpi_dr.htm
BoG, FRS (2014). Why does the Federal Reserve aim for 2% inflation over time? Board of Governors of the Federal Reserve System. Retrieved December 5, 2014 from http://www.federalreserve.gov/faqs/economy_14400.htm
Fox, J. (2014). What Alan Greenspan has learned since 2008. Harvard Business Review. Retrieved December 5, 2014 from https://hbr.org/2014/01/what-alan-greenspan-has-learned-since-2008/
U.S. Federal eserve and European Monetary System
US and European Money Systems
US Federal eserve
With the passage of the Federal eserve Act, the Congress of the United States of America established the primary monetary objectives of the institution. The primary goals of The Act are as follows: 1) To maximize employment; 2) to foster stable prices; and 3) to establish long-term interest rates. The dual mandate, as it is often called, of the Federal eserve (aka "The Fed") encompasses the first two of these objectives. The duties of the Federal eserve have increased over the past several decades and now encompass the following:
Implementing the monetary policy of the U.S.;
egulating and supervising banking institutions;
Ensuring a stable national financial system;
Providing financial services as a central bank to the U.S. government, domestic depository; institutions, and foreign official institutions;
esearches and publishes about the national economy;
To address the…
Monetary Policy and International Exchange ate
A factor leading to an increase in a supply of money is a rise in a demand for the bank reserves influencing an increase in the money supply. To prevent a rise in the money supply, the central bank will purchase bonds to increase the quantity of non-borrowed reserves in the economy thereby shifting the amount of money reserves to the right preventing the central bank fund rates from rising. The strategy is to use the open market purchase to make the money supply and monetary base to rise. As being revealed in Fig 1, if the goal of the central bank is to maintain the interest rate target at r1, the central bank will reduce the quantity of the money supplied in the economy especially when an economy is experiencing a recession.
Fig 1: Interest ate Target
Moreover, when the central…
Bergin, P. (2015). The Monetary Union. The Concise Encyclopedia of Economics. Library Economic Liberty.
Chennells, L. & Wingfield, V. (2015). Bank failure and bail-in: an introduction. Quarterly Bulletin 2015 Q3:228-241.
Frederic S. M. (2007). The Economics of Money, Banking and Financial Markets. (8th edition). Pearson Education.
House of Common (2009). Banking Crisis: The Impact of the Failure of the Icelandic Banks: Fifth Report of Session 2008-09; Report, Together with Formal Minutes. Treasury Committee.
Monetary Policy Actions in Recent Months
Economic developments seem to have experienced a slow and yet steady development in recent months. A series of factors like household spending and increasing job gains played an important factor in this respective development, as they have made the market as a whole more secure. The Federal Open Market Committee has carefully monitored this process and aims to achieve price stability and a larger increase in the number of jobs available. The Committee has designed a plan for adjusting the monetary policy in order to make it possible for economic activity to improve gradually. Even with this, there is a great deal of challenges in this context, with international financial developments influencing the country's economy.
The presence of a new monetary policy is likely to hold inflation at a low rate in the near future. This is largely due to the fact that energy…
Coolinge, C. A. & Ayers, R. M. "Economics by Design: Survey & Issues," (Pearson Prentice Hall, 1 Jul 2003)
"Press Release," (March 16, 2016), Retrieved March 20, 2016, from http://www.federalreserve.gov/newsevents/press/monetary/20160316a.htm
The Fiscal and Monetary Policy and Economic Fluctuations
The current economic situation in the United States is far different than it was 5 years ago. In 2010, the economy was very stale. The stock market was low, the housing bubble had popped, and unemployment figures were high (Schwartz, 2015). Now, while there are still serious and important issues with the U.S. economy, the general trend is for growth and recovery (Harlan, 2015). Interest rates on mortgages and other purchases have stayed low, allowing for people who want to buy homes -- especially for the first time -- to afford them. Home prices, though, have started to slowly rise, at least in many areas of the country. That is good news for sellers, because it has given them the opportunity to sell their homes at prices that are reasonable to them, so they can get out from under their…
Bloomberg News (2014). Factories charge ahead to propel U.S. into 2015: Economy. Bloomberg Business. Retrieved from http://www.bloomberg.com/news/articles/2014-12-15/industrial-production-in-u-s-increases-by-most-since-may-2010 .
Harlan, C. (2015). U.S. economy added 295,000 jobs in February. The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/06/u-s-economy-added-295000-jobs-in-february/ .
Schwartz, N.D. (2015). Growth rate put at 2.6% as economy pulls ahead. The New York Times. Retrieved from http://www.nytimes.com/2015/01/31/business/economy/us-gdp-fourth-quarter-economic-output.html?_r=0 .
Goals of a Monetary Policy
Monetary policy is a complex framework of money demand and money supply. It cannot be framed easily as the formulating of the monetary policy for the state is a massive responsibility for the central bank of that state because the composers of the monetary policy are very well aware of the fact that there little mistake can cost the state and its economic development a lot. (Labonte, 2006)
Monetary policy can be defined as a set of policies that are related to the supply of money. As the sole agency which is responsible for the money supply in a state is the central bank of that state, therefore, monetary policy can also be defined as the rules, policies or statements of the central bank of a state, especially of its board of directors, that have an impact on the aggregate demand and national spending.…
Bordo, M. et al. (2012) Epilogue: Foreign-Exchange-Market Operations in the Twenty-First entury. [e-book] Cleveland: FEDERAL RESERVE BANK OF CLEVELAND. p.10-12. http://www.clevelandfed.org/research/workpaper/2012/wp1207.pdf [Accessed: 23rd April 2013].
Cambazo-lu, B. And Karaalp, H. (2012) The Effect of Monetary Policy Shock on Employment and Output: The Case of Turkey. [e-book] Istanbul: Gedik University. p.24. http://ijes.info/2/1/42542102.pdf [Accessed: 23rd April 2013].
Driffill, J. et al. (2005) Monetary Policy and Financial Stability: What Role for the Futures Market?. [e-book] London: Birkbeck University of London. p.2-4. http://www.ems.bbk.ac.uk/faculty/driffill/research/finstability.pdf [Accessed: 23rd April 2013].
Gaspar, V. And Abreu, I. (1999) Price Stability and Intermediate Targets for Monetary Policy. [e-book] Lisboa: BANCO DE PORTUGAL. p.2. http://www.ecb.int/home/pdf/students/booklet_en.pdf [Accessed: 23rd April 2013].
An Economic Simulation: EconolandQ7. What government expenditure decisions did you make during different phases of the simulation? How do changes in government spending affect the consumption level?During the first and second years of the simulation, I kept corporate and individual income tax rates too high to sustain economic growth, and also kept the interest rate too high at 3% and then raised it to 7%, which discouraged borrowing for new investments. When the world economy slowed down, this further discouraged consumption. Lowering the interest rate by the third year was helpful, even with raising income and corporate taxes. Reinvesting the gains from such taxes into government infrastructure can be very helpful to further encourage spending by consumers and businesses. By the fourth year, despite the instability in the world economy, the lack of a budget surplus, government reinvestment in the economy, and keeping the interest rate stable resulted in continued…
" Andrews, 2004)
The Fed has always been most concerned about the economy growing too fast, outpacing real development, than other, more publicly influenced government agencies, which are apt to look upon growth with purely rose colored glasses, as consumers wish to see more jobs and retailers wish to see more immediate short-term sales to generate profits. Also, consumers wish to borrow more money for durable goods. and, despite the recent strong economic numbers regarding job growth, "the economy is still showing signs of fragility." There is a fear that "temporary factors," such as seasonal factors and deep discounts offered by makers of cars and other durable goods, rather than permanent and long-lasting improvements in the American economic infrastructure. (Andrews, 2004)
Andrews, Edmund L. (November 8, 2004) "Fed expected to stay the course for now." The New York Times. Business Section. http://www.nytimes.com/2004/11/08/business/08fed.html?oref=login
Andrews, Edmund L. (November 8, 2004) "Fed expected to stay the course for now." The New York Times. Business Section. http://www.nytimes.com/2004/11/08/business/08fed.html?oref=login
A meeting between heads of state: President Obama of the United States and Naoto Kan of Japan has just concluded. he focus of the discussion was the exchange rate between the U.S. dollar and the Japanese yen. he president and prime minister along with the respective central bank heads agree that the current market exchange rate of 120 Yen to the dollar is too high, and as a result the respective governments will take steps to drive the value of the yen lower concomitant with an increase in the value of the dollar. o achieve this end government and central bank directives manifest themselves in several policy options.
Many policy advisors and officials contend that currency manipulation has no significant impact on exchange rates because annual official foreign exchange purchases of 40 billion to 70 billion per year by countries such as Japan and China pale…
The second method of moving the exchange rate between the yen and dollar is the one-way purchases of the dollar via the U.S. And Japanese central banks (See Appendix I- Direct Currency Purchases). An increase in the demand for the dollar will cause its value to rise relative to the yen; likewise the sale of yen in the open market will lead to a devaluation of the yen in relation to the dollar. It is important to remember that the context for these policy actions is to allow the Japanese yen to depreciate, which will have the effect of making their exports less expensive to foreigners and as such exports will increase. Second a devalued yen relative to the dollar will be an inflationary pressure on the Japanese economy which has suffered from extensive deflation over the past two decades.
Economic Stabilization Policies
Stabilization policies implemented either through monetary or fiscal policy are designed to smooth out the vicissitudes of the economic cycle by stabilizing the aggregate demand function. Economic stabilization has been an explicit goal of U.S. policy since the Employment Act of 1946. This act states that "it is the continuing policy and responsibility of the federal government to . . . promote full employment and production" (Mankiw, G. 2004). The Federal Reserve can use monetary policy to stabilize aggregate demand, while Congress can use fiscal policy in the form of government spending to achieve a similar function.
fiscal and monetary policy.
On the most basic level, the primary difference between fiscal and monetary policy is that fiscal policy pertains to the actions of the federal government designed to influence the national economy through government spending and taxation while monetary policy refers to the actions of the central bank to govern the money supply. Tight or restrictive monetary and fiscal policy is used to curb inflation; a liberal monetary and fiscal policy is used as an economic stimulus (What is the difference between fiscal and monetary policy, 2002, As Dr. Econ).
2-Compare and contrast Keynes and Hayek
According to Keynes, it was sometimes necessary for the federal government to take a role in managing the economy, to correct the ebbs and flows of the business cycle. During severe recessions consumers became wary about losing their jobs, stopped spending money, and this further curtailed economic growth. Eventually, more and…
Koehn, Nancy. (2011). Tale of the dueling economists. The New York Times. Retrieved:
Nasar, Sylvia. (2011). Hayek, Keynes and How to Prevent Economic Crises. Bloomberg.
This suggests that fine-tuning the model may be required in order to identify optimal approaches. For instance, Gionnani and oodford add that, "It is only if we ask whether the same policy continues to be optimal when we vary the statistical properties of the disturbances that we can hope to find an advantage of one representation of the policy rule over the other (1427).
Gionnani points out that rather than restricting the analysis to the Taylor rules component of the new Keynesian model, an optimal model should determine a robust optimal monetary policy rule within a larger family of rules that is sufficiently flexible to implement the optimal plan in those cases where the parameters are known with certainty. A study by Leeper reports that optimal monetary policy behavior in the simplest forward-looking version of the popular class of dynamic stochastic general equilibrium models with nominal rigidities. oodford (2003) exhaustively…
Blanchard, Olivier and Jordi Gali. (2007). "Real Wage Rigidities and the New Keynesian
Model." Journal of Money, Credit & Banking 39(1): 35-7.
Dotsey, Michael and Andreas Horstein. (2006, Spring). "Implementation of Optimal Monetary
Policy." Economic Quarterly 113-34.
Trace Reasoning Monetary Policy Enhanced a Flexible Exchange System
The paper will attempt to analyze why monetary policy tend to be more effective under flexible exchange rate system and less effective under fixed exchange system. Flexible exchange rates occurs when the exchange rate is allowed to move freely based on the demand and supply and the vice versa is true. The main argument in this case is flexible exchange rate is important because it allows forces of demand and supply to play their role without government interventions in situations where the monetary system is running well
It is laudable to note that monetary policy is an effective tool for policy makers in stabilizing the economy and for many countries this is such an important tool than the fiscal policies. In a flexible rate system, as we have mentioned above, the exchange rate is determined directly by market forces, and it…
Ching-Chong Lai, Chau- Nan Chen, Flexible Exchange Rates, Tight Money Effects, and Macroeconomic Policy, Journal of Post Keynesian Economics Vol 7, No.1 1984, pp 128-133
Dallas S.Batten & Mack Ott, The Interrelationship of Monetary Policy under Floating Exchange, Journal of Money, Credit and Banking. Vol 17, No.1. 1985, pp103-110
Francisco R. Casa, 1997. Capital Mobility and Stabilization policy under flexible exchange rates; Revised Analysis.
Southern Economic Journal Vol 43, No.4. pp, 1-10
Rba on Australian Monetary Policy
Outline and critically appraise the Reserve ank of Australia's rationales for the current stance of Australian monetary policy.
In a scenario where Australia has been witnessing a unique mix of economic and monetary indicators, the Australian monetary policy strives to fathom the market mechanisms, both domestic and global, and lead it onto the path of sustained economic growth. The U.S. And Chinese economies have been showing an emerging trend, and seems to be all set to drive the global economy with their strong economic statistics. Nonetheless, the consumer confidence reflected even in the Australian share market in 2004, has already prepared a strong ground for it to enter the current year with enhanced prospects. The latest consensus forecasts a global growth of 4.2% in 2005, which though lower than the estimated 4.9% in 2004, is considerably a modest slowdown. Though the global economic growth may…
1. The testimony of the Governor of the RBA, before the House of Representatives Economics Committee, 18 February (Sydney). File: "MonthReviewFeb05.pdf"
2. Reserve Bank of Australia (2005) Statement on Monetary Policy, 7 February. File: "statement_on_monetary_0205.pdf"
U.S. MONETAY POLICY IN THE 1990s
Monetary policy refers to actions the Federal eserve (Fed) takes to influence the amount of money and credit in the U.S. economy. Interest rates and the performance of the economy are affected by what happens to money and credit. The rapid increase in the supply of money and credit over time could result in inflation, a sustained increase in the general level of prices, which translates into a decline in the value or purchasing power of money. The goals of monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates. Effective monetary policy by the Fed can maintain stable prices thus supporting economic growth and employment ("Monetary Policy Basics, NDI).
The low inflation rates of the 1990s were not unique, but were a marked change from the 1970s and 1980s. The 1950s and 1960s were also periods…
Mankiw, N.G. (2001, August) U.S. monetary policy during the 1990s. Social science research network. Department of Economic Research; National Bureau of Economic Research, Harvard University. Retrieved October 18, 2012, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=279232
"Monetary policy basics." (NDI). Federalreserveeducation.org. Retrieved October 18, 2012, from http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/
Nelson, C.R. (2010, January 22). Macroeconomics: an introduction. Chapter 9: Monetary Policy, Internet Edition. Retrieved October 18, 2012, from http://www.econ.washington.edu/user/cnelson/Chap09.pdf
Fiscal and Monetary Policy in a Fictitious Economic Scenario
Recently, all of all Street waited with bated breath for Allen Greenspan to announce what would be the shift in the Federal Reserve's upcoming policy regarding interest rates, given that our national economy was apparently recovering at a much stronger than expected pace. Dismayed at the news that the Fed was likely to raise rates, thus encouraging saving and tempering consumer spending, the stock market temporarily took a nosedive. It was speculated that this information might have been leaked, to assess all Street's reaction to a possible rate hike. The Fed retracted its position, slightly.
This recent dialogue of public relations and monetary policy highlights the impact even suggestions by the federal government and the Federal Reserve chairman regarding national fiscal and monetary policy respectively can have upon the nation. Fiscal policy is the use of government spending and taxes to…
FRBSF. (2004) "How the Fed Guides Monetary Policy." Federal Reserve Bank of San Francisco Website. http://www.frbsf.org/publications/federalreserve/fedinbrief/guides.html
Herman-Ellison, Lisa. (February 7, 2003). "Fiscal and Monetary Processes." National Council on Economic Education. NCEE Website. http://www.frbsf.org/publications/education/greateconomists/grtschls.html#A8
How do open market operations work through the fractional reserve banking system to impact the money supply and interest rates?
The fractional reserve banking system ensures that rampant speculation will not occur, as the money supply must be backed by a certain percentage of reserves held by banks, determined by the discount rate. This is intended to prevent the runs on banks as occurred after the 1928 'Great Crash' of the stock market.
hat potential problems arise from government guarantees?
Government guarantees can encourage foolish or wasteful economic practices by providing a 'safety net' for foolish economic practices.
hy does the CPI overstate the inflation rate, and why this is a problem?
The Consumer Price Index only keeps track of some goods from month to month bought by consumers, considered basic sustenance items that may be more subject to inflation than other goods. But when it is reported that the…
Outline of the U.S. Economy." (2005) U.S. Government Publication. Retrieved 2 Oct 2005 at http://usinfo.state.gov/products/pubs/oecon/chap7.htm
Fiscal and Monetary Policy and Economic Fluctuations
The global economy was relatively doing fine more than five years ago before it was hit by economic downturn or recession. During this period, the American economy was at its peak, particularly in the fourth quarter of 2007. However, this was followed by a mild recession at the beginning of 2008, which eventually turned into a severe credit crisis across the world approximately one year later. While only a few countries escaped the economic recession, virtually no country could avoid the severe bear markets in stock (Norris, 2012). Some countries like the United States experienced changes in gross domestic product and stock markets. Since it has the best record of the main developed countries, the United States was severely affected by the recession. As the economic downturn came to end, America started the process of recovery from the effects of the recession. This…
Davidson, P. (2013, September 11). Economy is Still Bruised Five Years After Crisis. USA
Today. Retrieved November 24, 2013, from http://www.usatoday.com/story/money/business/2013/09/10/economy-2008-financial-crisis-lehman/2789841/
Klimasinska, K. & Chandra, S. (2013, August 27). America Resilient Five Years After Great
Recession. Bloomberg. Retrieved November 24, 2013, from http://www.bloomberg.com/news/2013-08-27/america-resilient-five-years-after-great-recession.html
Fiscal and Monetary Policy
How is a recession defined? Is the U.S. currently in a recession? Explain.
The National Bureau of Economic Research (NBER) is widely recognized as the arbiter of starting and ending dates of U.S. recessions (Burtless, G. April 19, 2010). As such, NBER indicates, recessions start at the peak of a business cycle and end at the trough; and are a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales (National Bureau of Economic Research. 2011). The last U.S. recession, coined the Great Recession, ended in June 2009, 18 months after the economy began sliding into a downturn in December 2007 (Murray, S. September 21, 2010) according to NBER.
While more than eight in 10 Americans think the economy is in another recession, according to a new CNN/ORC…
"Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes" (Mankiw, G.N. 2004). Reviewing the 2011 Obama Budget of 3.69 trillion (The New York Times. February 1, 2010), an immediate consideration regarding the outlays is that mandatory spending: Social Security, Medicare, Interest on Debt; 64% of the total proposed budget, is effectively off limits to changes. The remaining discretionary spending of 1.415 trillion is available as a fiscal tool (The Washington Post.com. 2010). Certainly, the President could propose additional spending measures such as his American Jobs Act released in September 2011.
Concomitant to discretionary spending is the revenue collected by the Federal Government in taxes, 2.57 trillion in the 2011 Obama budget (The Washington Post.com. 2010). One of the prominent fiscal tools the President has utilized is deficit spending, 1.27 trillion in the proposed budget to stimulate the economy (The Washington Post.com. 2010). Government spending reflects a belief in the multiplier demonstrated by "additional shifts in aggregate demand when expansionary fiscal policy increases income and thereby increases consumer spending" (Mankiw, G.N. 2004). There is debate over the size of the multiplier; Keynesians contend it is greater than one, while supply- side economists believe the coefficient is significantly less than one. While this debate is important, the reality is that Congress and the President will not agree on further government spending to stimulate the economy, given the deficit and the explosion of debt past 15 trillion dollars.
The other fiscal policy tool available for use is tax cuts, which allow individuals and businesses to keep more of the money they earn, a portion of which will be saved, and a part which will be spent. The consumption side will lead to increased aggregate demand allowing the economy to grow. In the longer-term though the reduction in marginal tax rates will engender an environment leading to greater incentives to work, save, and invest. Tax cuts though must strive to be revenue neutral from an accounting perspective, with the understanding that there will be a strong economic effect. The
4. Of the criticisms, some are valid and some are not. Clearly, nobody who has looked at the evidence will think that unconventional monetary policy is inflationary. Inflation is low, and interest rates are rock bottom. Under normal conditions, this policy would be inflationary, but it is likely only going to be used in crisis times, when the normal predicative conditions do not hold. However, expansion of the Fed's balance sheet is risky. Certainly, if it needs to shrink its balance sheet this could prove contractionary -- timing of such moves needs to be spot on. The last complaint -- that unconventional monetary policy is not particularly effective -- is a legitimate criticism. Despite the massive efforts we have seen in the past several years, economic growth in the U.S. remains muted and unemployment stubbornly high. If a central bank is going to take these sorts of risks, it should…
Inflation remains low because of the seemingly unchanging rate of unemployment and income. In addition, the low inflation rate is associated with the slow economic activity during the winter months because of adverse weather conditions (Liu, 2014). One of the major reasons for the minimal changes in U.S. interest rates as compared to five years ago is the slow recovery in the housing sector. The housing sector continues to slowly recover from the effects of the 2008 global recession. This rate of recovery has had significant effects on the country economy as evident in the low interest rates.
Strategies to Encourage Consumer Spending:
The Federal eserve can use fiscal and monetary policy to develop strategies that will encourage people to spend money in order to stimulate economic growth. One of these strategies, which is a fiscal policy initiative, is government tax cuts that enhances the buying power of consumers. Tax…
Liu, H. (2014, April 28). Trading the U.S. FOMC Interest Rate Decision, April 30, 2014.
Retrieved April 28, 2014, from http://www.investing.com/analysis/trading-the-us-fomc-interest-rate-decision,-april-30,-2014-210865
Pettinger, T. (2012, May 18). Policies for Economic Growth. Retrieved April 28, 2014, from http://www.economicshelp.org/blog/5272/economics/policies-for-economic-growth/
Yellen. (2014, March 19). Transcript of Chair Yellen's Press Conference. Retrieved from The
economic situation in the United States is favorable compared with five years ago. Five years ago, it was late 2009 and in the depths of the Great ecession, so performing better than those levels is no great achievement. But as a point of comparison, all metrics are better today. The annualized rate of GDP increase in the third quarter of 2014 was 3.9%, down from 4.6% in the second quarter, according to the Bureau of Economic Analysis (2014). In 2009, the Q3 GDP was 1.7%, which is a low number, but at the time represented positive growth following three straight quarters of declines. Thus, technically, Q3 2009 was when we emerged from recession (Treasury, 2012). GDP growth in the interim has been uneven, but the past couple of quarters indicate healthy, manageable growth that should not lead to runaway inflation.
Unemployment, which is a lagging indicator, is 5.8% as of…
BEA. (2014). National income and product accounts, 3rd quarter 2014. Bureau of Economic Analysis. Retrieved November 25, 2014 from http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
BLS. (2014). Consumer Price Index Summary. Bureau of Labor Statistics. Retrieved November 25, 2014 from http://www.bls.gov/news.release/cpi.nr0.htm
BLS. (2014). Unemployment rate. Bureau of Labor Statistics. Retrieved November 25, 2014 from http://data.bls.gov/timeseries/LNS14
Board of Governors of the Federal Reserve System. (2013). Why does the Federal Reserve aim for 2% inflation over time? Board of Governors of the Federal Reserve System.
Fed's Bullard: Current Fed Policy Much Easier Now Than in 2012, which was published by The Wall Street Journal on February 14th, 2013, financial reporter Michael S. Derby methodically examines the claims of Federal eserve officials, who have stated that changes to their monetary policy have proven to be productive over the last year. The purpose of the article is to provide readers with access to the latest public statements made by Federal eserve Bank of St. Louis President James Bullard, a voting member of the monetary policy setting Federal Open Market Committee (Derby, 2013) who recently rendered his appraisal of the Fed's latest round of adjustments to its monetary policy. Derby makes reference to a crucial modification in which "the Fed decided to commit to keeping short-term interest rates near zero percent until what is now a 7.9% unemployment rate falls below 6.5%, as long as expected inflation doesn't…
Derby, M.S. (2013, February 14). Fed's bullard: Current fed policy much easier now than in 2012. The Wall Street Journal. Retrieved from http://online.wsj.com/article/BT-CO - 20130214-712932.html
Monetary policy and fiscal policy are the two main ways in which governments influence the health of the economy. Monetary policy is conducted by central banks, while other branches of the government are responsible for fiscal policy. The Federal Reserve illustrates the three major ways in which is uses monetary policy. Monetary policy reflects the amount of money that is in the economy, which in turn influences the health of that economy. The Fed sets monetary policy in line with seeking a stable rate of growth, controlled inflation and a healthy rate of job creation.
The primary means by which the Fed implements monetary policy is through open market transactions. These are the buying and selling of Treasury securities, or government debt. If the Fed wishes to increase the amount of money in the economy, it buys securities and if it wants to decrease the amount of money in the…
Policy and Politics
Policy and decision-making are complex issues. Even for what might appear to be a simple decision, there many underlying factors that influence the final outcome. Some of these factors are obvious, but some can be elusive and hidden from all of the parties. Policies are not instituted in a flash and the process of policymaking should not be taken lightly. This makes the process of policy making a slow one at best. The many facets of the issue must be discussed and debated for often long periods of time. Policymaking is wrought with many problems for which there is no obvious right or wrong answer. Deborah Stone addresses these paradoxes in The Art of Political Decision-making.
Stone's work stands apart from many authors that focus on the application of their model in only a few specific applications. One example is einhart and einhart (2011) who recently discussed…
Reinhart, C. & Reinhart, V. (2011). Limits of Monetary Policy in Theory and Practice. Cato Journal. 31 (3): 427-441.
Stone, D. (2001). Policy Paradox: The Art of Political Decision Making, W.W. Norton, third edition.
Thorson, K.(Producer) (2002-2008). The highlights of 100 [Television series episode]. HBO.
Retrieved from http://www.hbo.com/the-wire
To increase effective demand, Keynesians believe the government must balance the economy with deficit and increase expenditure. However, the constant alternation between booms and recession is causing the booms to get shorter while the recessions become longer. This phenomenon is the result of empirical evidence that indicates that in the end, the interest rates decrease.
However, this situation creates a problem of capitalism as the rich increase their wealth while financial deficit worsens. Minsky adopted the perspective of Keynesians, hypothesized financial instability, as the finance and money that connects the present with the future, but the future is uncertain. Minsky finds the problem of financial stability is in financing. However, financial instability increases under contemporary capitalism, which increases economic crisis. This leads to the conclusion that to solve economic crisis, there is a need to reduce financing and take up investments in real economy.
This is in contrast to the…
Cynamon, B.Z. And S.M. Fazzari (2008) "Household Debt in the Consumer Age: Source of Growth- Risk of Collapse," Capitalism and Society, Revised Chapter 6.
Cynamon, B.Z. And S.M. Fazzari and Setterfield, M "Understanding the Great Recession" CFS Chapter 1.
Fazzari, S.M. "The Legacy of Hyman Minsky and the Great Recession" Video Lecture, Washington University in St. Louis
Setterfiled, M. (2010) "Wages, Demand, and U.S. Macroeconomic Travails: Diagnosis and Prognosis," CFS Book.
International Monetary System and Exchange ate Policies
A report/essay: chapter 17, multinational companies. select topic research write: Multinational vs. domestic financial management exchange rates international trade international monetary system exchange rate policies trading foreign exchange european monetary union interest
rate parity/purchasing power parity international capital structures.
The international monetary system and exchange rate policies
International Monetary systems
These are a set of rules and that regulate how international trade and payments are handled. It facilitates the exchange of capital, goods and services among countries. However, this system does not have a physical presence but, it consists of interlacing rules and procedures and is influenced by the market of foreign exchange. An example of an international monetary system is the International monetary fund. These interlacing rules and procedures are referred to as exchange rate Policies.
Exchange rate policies
These are rules that officials of public finance from different nations have developed…
Eichengreen. (2011). Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System
Goyal, M., Raman, Wang, and Ahmed; . ( 2011). Financial Deepening and International Monetary Stability.
Michael C. Ehrhardt, & Eugene F. Brigham. (2011). Corporate Finance (4th ed.): Cengage.
OECD. (2011). The Effects of Oil Price Hikes on Economic Activity and Inflation.
Foreign Monetary System
A monetary system is any structure initiated by the government and mandated to issue currency, acknowledged as the medium of exchange by its citizens and governments of other nations. The central bank manages the monetary system of a country; this same bank has the responsibility of printing money and controlling the economy. Since the colonial period, coins from the European colonies had circulated in all the colonies. The Spanish coins gained dominance due to the scarcity of coins, during this time; the main form of trade was barter trade. The trade-involved items such as rice, tobacco, or animal skins, which took the form of money paper and notes, had varying rates of discount in different colonies rendering them of very low value (onald & Wright, 2006).
The high population in the U.S. called for increased trade and commerce. This forced the United States government to look for…
Ronald, M. & Wright, R.E. (2006). Development of the U.S. Monetary Union. Journal of Financial History Review, 13(1), 19-41.
Anonymous, (2011). Challenges and risks of the International Monetary System. Journal of Economic Review, 22(5), 768.
Eichengreen, B.J. (2008). Globalizing capital: A history of the international monetary system.
Princeton: Princeton University Press.
Fiscal and Monetary Issues in America
There are high tensions in the American economy today resulting from speculations whether the government will be able to hit the debt ceiling. Failure to hit the debt ceiling has serious economic effects to many sectors of the economy both in the United States and various countries of the world. Political disagreements regarding the budget delay decision-making process as the date ceiling draws closer each day. The government debt will cause disruption and failures in the U.S. market system and beyond because some rates will double while others will completely fall. The consequences of these are both the government and private sector failures and the economy will not be in a position to sustain itself. Government securities will lose market value and the cost of bonds will double because of the risk premiums. The result of this is government deficits, which will require…
Eichner, A.S., & Kregel, J.A. (1975). An essay on post-Keynesian theory: a new paradigm in economics. Journal of Economic Literature, 13 (4), 1293-1314.
Moseley, F. (1995). Heterodox Economic Theories: True or False?. Brookfield: Edward Edger
Lee, F & Bekken, J. (2009). Radical Economics and Labor. New York: Routledge Publishing.
During times of extreme pressure from the supply or demand side, the central bank is prepared to go in and support the currency, to help provide stability. This is significant because traders around the world; will use the major currencies as a way to hedge themselves against different risks. Where, they will view the weakness of one country's currency as a sign that they could be facing a number of different economic challenges. (Fixed vs. Floating Exchange Rate, 2007) a good example of this can be seen with the ritish pound, where the ank of England decided to keep interest rates at .5%. This is important, because the increase in rates could be seen as a sign that economic stability could be returning to the country, which would help to reverse the downward pressure on the pound. However, the fact that they decided to keep interest rates unchanged, means that…
12 Myths of International Trade, 1999, Meti, viewed 3 May 2010,
Bank of England's Decision Affects Pounds Performance, 2010, to Forex News, view 3 May 2010,
Bretton Woods Agreement, 2010, Investopedia, viewed 2 May 2010, .
Fixed vs. Floating Exchange Rate, 2007, Article Base, view 3 May 2010,
Historical evolution of functional responsibilities of SAMA
History of SAMA (Saudi Arabian Monetary Agency)
The Saudi Arabian Monetary Agency (SAMA) was established on October 4th, 1952 and is headquartered at iyadh, Saudi Arabia. SAMA operates as the central bank of the Kingdom of Saudi Arabia (KSA). Before setting up the Saudi Arabian Monetary Agency, KSA utilized the service of Saudi Hollandi Bank as the central agency to keep the governments gold reserves. The idea of setting up SAMA as the central government operated agency was materialized by Abdallah Sulaiman, the then finance minister of KSA. The currency that SAMA regulates and prints is the Saudi iyal, the official currency of KSA. The establishment of SAMA was decreed by King Abdul Aziz on 25/7/1371H, 20th of March, 1952 (SAMA, 2013).
SAMA is currently the official agency charged with management of financial system. With the evolution and development of…
Ramady, M.A. (2010). The Saudi Arabian economy: policies, achievements, and challenges. Springer.
SAMA. (2013). Historical Preview. Saudi Arabian Monetary Agency. Retrieved from: [ http://www.sama.gov.sa/sites/samaen/AboutSAMA/Pages/SAMAHistory.aspx ]
With a lower interest rate, that incentive no longer exists and this is usually an instrument by which private entities can be driven out of saving and into investing into new business on the market. Obviously, such an action usually creates the appropriate momentum for economic development, creating jobs, increasing governmental revenues through revenues from taxation and helping the country out of the economic recession.
In terms of fiscal policies, the measures that the government needs to take will all attempt to move the IS curve further to the right and, in this sense, to stimulate the national economy, reduce the period that the country will pass through the recession and determine a national economic growth. There are two important means by which this can be done: increased governmental spending and decreased taxes, with a less restrictive taxation policy. As we can see on the IS - LM graph, both…
National Economic Policies
Economic policies refer to the crucial action that the government takes to control the economic aspects that might affect the cash flows in any given nation. The government is essential in ensuring that all the economic activities in the nation maintained to secure the profitable margins of the nation. The economic policies control almost every activity in the nation, which are vital in controlling the economy. The national economic policies control the large economic fields of a given region to ensure that the nations make profits (Cohen 123). Most of the national, economical aspects are more vital in controlling the imports and exports into nations. The national economic policies generated by international institutions, established by the member state nations. In creating the management team of the international institution, each nation is required to give a leader that will assist in creating the policies to govern the economy…
Cohen, Stephen D. The Making of United States International Economic Policy: Principles,
Problems, and Proposals for Reform. Westport, Conn: Praeger, 2000. Print.
Persson, Torsten, & Guido E. Tabellini. Political Economics: Explaining Economic Policy.
Cambridge, Mass. [u.a.: MIT Press, 2000. Print.
(Minford; Walters, 2004, p. 306)
(xii) Competition to the U.S. dollar: In the likelihood of UK joining the EMU and adopting the single currency, the threat posed by the only international competitor to the U.S. dollar, the euro, would become real. Therefore, the U.S., at least would not encourage such a move and witness a downturn to its currency, the only true international currency. (Minford; Walters, 2004, p. 306) However, not all economic issues go against UK's joining the currency union. There are several factors which may benefit the UK if it joins the EMU.
Arguments in favor of joining the EMU
Some of the factors which support UK's joining the EMU are:
(i) A unified Europe where trade barriers are abolished and specialization and economic transactions occur as per the "Law of Comparative Advantage" will result in enhanced production and increase in the level of living standards. Increase in…
De Grauwe, Paul. 2007. Economics of Monetary Union. Oxford University Press.
El-Agraa, A.M. 2007. The European Union. Cambridge University Press.
Harris, Neil. 2001. Business economics. Butterworth-Heinemann.
Mankiw, N. Gregory; Taylor, Mark P. 2006. Economics. Cengage Learning EMEA.
International Monetary System
In world trade, varied national currencies are swapped for each other by means of rules and procedures set by a system called the international monetary system. To delineate a general standard of value for the world's currencies, such a system is believed to be necessary.
The global monetary structure has always adhered to the organizational framework of the international discipline. In each stage of the financial capitalism there exists a corresponding monetary approach. The monetary structure during the postwar periods catered to the dominance of the United States. This was applied as a tool during the period to enforce the U.S. dominance over all its allies and the developing countries, irrespective of the socialist countries isolated themselves being unconnected from the influence of the financial and monetary disciplines of the global capitalism.
Gold standard was the first contemporary international monetary system. The gold standard contributed for the…
Amin, Samir. Replacing the International Monetary System? - Current Failures of Global Economic Policy. Monthly Review. Volume: 8; No: 1; October, 1993. pp: 93-98
Holloway, Thomas. M. The International Monetary System: Essays in World Economics. - Book Reviews. Monthly Labor Review. Volume: 12; No: 1; January, 1998. pp: 158-164
International Monetary System. The Columbia Encyclopedia. Sixth Edition. 2001. Retrieved from http://www.bartleby.com/65/in/intlmone.html Accessed on 12 November, 2004.
Little, Jane Sneddon; Oliveri, Giovanni. P. Rethinking the International Monetary System: An Overview. New England Economic Review. Volume: 16; No: 1; November, 1999. pp: 24-29
According to Chancellor Helmut chmidt the interest rates of the developed countries in the post1990 era were higher than they had ever been "at any time since Jesus Christ" (http://hdr.undp.org/external/HDR_papers/oc3b.htm). In 1983, in Latin America, whose devaluations were enormous, it was recorded that in one year "the effect on the individual private sector, which in [some] cases had been encouraged by the policies of the authorities to borrow, has been devastating...the amount needed in local currency to service external debt has increased three or four times" (Kuczynski,1983, p. 22). The situation in these countries is such: with the decrease of their currency value, more goods must be sold to pay back their debt plus interest, and since their export prices have been steadily declining in the post war years, their accumulated interest swells to a rate that is higher than the nominal dues stipulated in the original contract (http://hdr.undp.org/external/HDR_papers/oc3b.htm). In…
Developing countries in the international economic system. Accessed on 1/13/2011 from: http://hdr.undp.org/external/HDR_papers/oc3b.htm
InfoPlease, International finance. The International Monetary System. Accessed on 1/13/2011 from: http://www.infoplease.com /cig/economics/international-monetary-system.html
Kahn, a.A. (19-Jan-2009). International monetary system, globalization, and developing countries. The News, Accessed on 1/13/2011 from: www.opfblog.com/3909/international-monetary-system
Kuczynski, P.P. (1983). Latin American Debt: Act Two, Foreign Affairs, 22-29
Federal Reserve Policies 2000-
The first decade of the 21st century saw the U.S. economy on a peripatetic through tumultuous events, euphoric highs, and abysmal lows. The ten-year window highlighted three periods: 2000-2004, 2004-2007, and 2007-2010 in which the Federal Reserve actively utilized their policy levers to achieve their dual policy mandate of full employment and low inflation. The Fed's policy bag includes: the Fed funds rate, open market operations, discount rate, reserve requirements, and margin rates all of which were utilized during these three periods to achieve the ostensible goals of Fed policy. t is worth noting that in each of the three periods the Fed responded to economic conditions which they perceived to be harbingers of either inflationary pressures or anemic GDP and employment growth.
On March 10, 2000 the NASDAQ composite, a stock index representative of high flying dot-com companies, peaked at 5048 (Zarroli, J. March…
It is far too easy to be a Monday morning quarterback in regards to Fed policy and its role in igniting the financial crisis of 2008-2010, yet economists and pundits nevertheless look to the Fed as an easy target for the deleterious recession. One of the expected effects of monetary easing through open market operations of bond purchases, low Fed funds rates, and low discount rates is that credit in the banking system has a mellifluous flow which allows for greater lending to business and consumers. It is not surprising then that mortgage lending boomed in the years 2000-2004 with Fed funds rate declining throughout the period and mortgage rates at multi-decade lows. What is surprising however is the extent to which housing values skyrocketed from 2000-2007?
"From 2000 through 2006, national home prices rose by 88.7%, far more than the 17.5% gain in the consumer price index or the paltry 1% rise in median household income" (Siegel, J. October 27, 2009).
While low rates certainly did contribute to the boom in housing, the greater cause of the home price bubble growth and implosion which the country is still feeling the effects of, was Freddie, Fannie, low underwriting standards, NINJA products, and no down payments. The housing bubble burst in 2007 some three years after the Fed started raising the Fed funds rate; as such the logic of economists such as John Taylor is confusing at
Turkey -- Fiscal and Monetary Policy
Fiscal policy refers to how a government adjusts its level of spending on various goods and services it provides to a population. Governments can spend money in a number of different ways that ultimately serve the public good. They can employee people to work on various projects. For example, the government can invest in things like health care, infrastructure, or education. Investments in such project can have a significant impact the country's economy. hen the government spends money there is a multiplier effect that injects money into the economy. For example, when the government pays an employee then that employee has money to spend on housing, food, entertainment, and other items which helps to stimulate the economy on an aggregate level.
Monetary policy is an entirely different type of policy tool than fiscal policy. This policy is determined by a federal bank…
Bureau, P. (2012, November 3). PESTLE Analysis of Turkey. Retrieved from Market Analysis: http://market-analyis.blogspot.com/2012/11/pestle-analysis-of-turkey.html
Business Insider. (2011, March 9). Turkey: A Model of Middle East Stability. Retrieved from Business Insider: http://www.businessinsider.com/turkey-a-model-of-middle-east-stability-2011-3
Cademir, Y., & Peker, E. (2013, January 22). Turkey's Central Bank Keeps Easing Monetary Policy. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB10001424127887324624404578257711555813602.html
Reuters. (2013, July 8). Turkey's Central Bank kicks off monetary tightening, dollar down from all-time high. Retrieved from Hurriyet Daily News.
Xian Feng emperor. A national monetary policy relates to issuing paper money. In the case of the emperor, this policy was done incorrectly and the government should not issuing paper money as the sole way to solve financial deficits. hat will be posed in this report will be some solutions and comparisons that would helped the country economically during that time period. The relevant time periods for this report shall be during the time of the Xian Feng emperor (1831-1861) and the later part of the Qing era
Xian Feng Emperor & Qing Government.
In general term, the 1700's was a prosperous point in time for the Qing government. Their empire was stable, China's borders were secured and agricultural production was strong enough to keep food shortages at bay and taxes for peasants low. However, during the 19th century, the Qing government was challenged by several threats and problems. These…
Horesh, Niv. Chinese Money In Global Context: Historic Junctures Between 600 BCE
& 2012. 1st ed., Stanford University Press, 2013.
Von Glahn, Richard. Fountain Of Fortune. 1st ed., Berkeley, Calif., University Of
California Press, 1996.
He focused on tariff reform in the Underwood-Simmons Act by arguing that high tariffs created monopolies and hurt consumers, pushed to end certain child labor practices, and above all tried to engender a fairer distribution of public funds for housing, utilities, and public projects (Wilson, 2011).
However, looking back at his pre-World War I policies, it was his adamant work on currency and banking reform that seemed to have the greatest impact on American society. The Federal eserve's Monetary Policy is the most important function of the Fed and is probably the most used policy in macroeconomics. Monetary policy refers to the actions undertaken by a central bank, such as the Federal eserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal eserve Act of 1913 gave the Federal eserve responsibility for setting monetary policy. The Federal eserve controls the three…
Grant: A Reference Resource. (2011). Miller Center at the University of Virginia. Cited in: http://millercenter.org/president/grant/essays/biography/4
Woodrow Wilson. (2011). Conservapedia.com. Cited in: http://www.conservapedia.com/Woodrow_Wilson
Wilson: A Reference Resource. (2011). Miller Center at the University of Virginia. Cited in:
Thorndike, Joseph J. "The IRS Is Hiding Its History." The ashington Times.
December 19, 1997, p. A23. February 18, 2008. http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/9de7fcd59915a3be85256e430079327d?OpenDocument
After 9/11, the Federal Reserve Bank, then led by Alan Greenspan, used monetary policy reduced the interest rate, or the rate that consumers must pay to borrow money. This did encourage individuals to spend more. However, it is still debatable if this was the most vital component in extricating America from the throws of economic recession. Government spending, or fiscal as opposed to monetary policy, is often seen as a more direct and superior way to rapidly change economic conditions. Fiscal policy was required to stimulate America's recovery from the Great Depression, according to conventional wisdom, although some still argue that it was the Hoover administration's monetary policy that was ineffective, not that monetary policy was ineffective altogether.
But most economists believe that, to get the…
Heakal, Reem. "What is fiscal policy?" Investopedia. October 22, 2008. http://www.investopedia.com/articles/04/051904.asp
Fairness does matter when creating a tax system. In terms of a consumption tax, the poor often consume more than the rich, at least in terms of a percentage of their income. While for a wealthy individual, much of his income can be locked up in assets, making money off of money, for a poor individual, the bulk of his or her income is devoted to buying necessary goods, including rent and food. The consumption tax taxes everyone equally on the surface, regardless of how someone has benefited from the economic system of a particular society, and actually favors those who can allocate their income to sectors of the economy that are not taxed (such as investments, which are not technically consumption).
A flat tax, where everyone pays the same amount, has similar problems in terms of allocating wealth. 15% of a poor person's income, a person who must pay for his or her rent, food, and necessities out of his or her weekly paycheck, means more to that individual than 15% of an income where much of that income can be devoted to investments and luxuries. While not as unfair as a consumption tax as investment income is also taxed, a flat tax is still unfair, and finding the right percentage to finance government operations yet not to be prohibitively costly for the poorest members of society is a difficult balance to strike. The only good thing about the flat tax is its simplicity, as along with the consumption tax as it requires less bureaucracy to enforce. Bureaucracy is expensive as well as frustrating (as anyone who has ever had to fill out a tax form beyond the standard EZ-file well knows!).
Germany has established itself as a successful country with a growing and stable economy. In terms of its economic policies, since 2014 its score has fallen by .2 placing it into rank 5 within the international top ranks. Of its many efforts to stabilize the country, the most notable is increased regulation, meaning pension-system expansions and a minimum wage (). Along with economic policies favoring regulation, Germany has remained strong in terms of employment growth and export performance, allowing for low unemployment rates and rising wages. While Germany has improved and stabilized, the rising influx of refugees has put a damper on the country's ability to create new policies for the labor-market.
Regardless, there are many positives in Germany's economic policies that has boosted tax revenue. The boost also comes in terms of reduction of debt-to-GDP ratio even with rising debt. Germany has done an amazing job of successfully addressing…
2004). The new Fed chairman would necessarily have to monitor inflationary pressures to prevent spikes in the cost of living. n this note the new Chairman would move from a policy of targeting core inflation which excludes the so called volatile food and energy prices, and focus on the headline rate which includes these components. Additionally the Consumer Price Index calculation would change to reduce the weight of housing in the index, "which makes up 41% of the typical consumer's budget" (Mankiw, G. 2004). More weight would be placed on those items which have steadily increased in price far above even the headline rate over the last decade: energy, food, health care, and education. These steps would help stabilize the dollar as a store of value for the consumer and investor.
The last selection criterion for the new chairman will be their belief in the purpose and efficacy of the…
On trade policy the administration strongly favors unfettered free trade between nations with reductions in tariffs, and the creation of compacts expanding access to global markets. "For more than two centuries economists have steadfastly promoted free trade among nations as the best trade policy" (Blinder, a.N.D.). The new administration will push for the immediate fast tracking of any trade pacts still on hold in Congress. Additionally the goal of establishing free trade alliances similar to NAFTA with all of the EU and Asia will be a strong priority.
On regulatory policy the Chair of the Council will need to embrace a policy of sound, logical, but limited regulation on business. The regulatory policy must be designed to ensure that consumers are protected however not impinge on the spirit of American entrepreneurship, risk taking, and profit maximization. Succinctly the administration "seeks more affordable, less intrusive means to achieve the same ends -- giving careful consideration to benefits and costs" (Obama, B. January 18, 2011).
The fourth piece of the economic policy puzzle is the administration's defense of a strong dollar policy. A weak and falling dollar robs the consumer
ules and Institutions of the Bretton Woods System
The increasing popularity of the importance of monetary unions has gained much focus in the recent past. Most states consider forming monetary unions a solution to most of their financial problems. However, they fail to realize the challenges associated with its establishment and sustainability. Therefore, this research paper analyzes two different monetary unions, their policies, failures and successes and lessons learnt from their experiences for future success of the monetary unions.
The key design features of the System
The system was designed with the fundamental aim of establishing an international financial system to overcome the real and perceived financial problems. Among the problems included the competitive devaluation, subordination of the monetary policy in relation to the external bane and the need for the establishment of a system that facilitated exchange rates for different foreign transactions (Eichengreen, 2004). The design of the system…
Ardy, B., 2000. Economic and monetary union: A review article. JCMS: Journal of Common
Market Studies, 38 (7), p.667.
Avgouleas, E. 2010. The governance of global financial markets and international financial regulation: Legal framework and policy directions. Cambridge: Cambridge Univ. Press.
Bernstein, E.M., and Kirshner, O. 1996. The Bretton Woods GATT system: Retrospect and prospect after fifty years. Armonk, NY [u.a.: Sharpe.
European Economic and Monetary Union (EMU) and the euro. Included is a critical assessment of the sources used.
All of the sources used for this report were well written, concise, and understandable. The European Union and the Euro are difficult topics to understand on a first reading, but the authors had a real understanding of their topics, and explained the issues clearly.
For example, Taylor gives the background that makes the forming of the European Union more understandable. "This Summit produced a communique which supported the idea of European Union by 1980, and proposed a great push towards a European Great Society, illustrated by the efforts made to push the European social programme forward at that time, which no member government opposed" (Taylor 10).
The subject could be considered dry, but Taylor gives it life, making his book interesting to read, and right to the point. He writes with authority,…
Barclays Capital. "Barclays Capital says new Poll Showing Depth of Opposition to Euro Suggests Gilts to Decouple from European Bonds." 30 Nov. 2001. 6 Dec. 2001. http://www.barcap.com/cgi-bin/pressreleases/public/newsView2.pl?item=2001113001
Bartlett, Patrick. "Problems' Threaten Euro Launch." BBC News. 4 Dec. 2001. http://news.bbc.co.uk/hi/english/world/europe/newsid_1691000/1691635.stm
Euro Web Site. "Questions & Answers on the Euro and European Economic and Monetary Union." 9 Sept. 1998. 5 Dec. 2001. http://europa.eu.int/euro/quest/
Europe Yes, Euro No! "Opposition to Euro Remains at Record Levels - Six Cut of Ten Labour Voters Say No." 3 Sept. 2000. 6 Dec. 2001. http://www.no-euro.com/release.cfm?IDNO=8Feld,Werner J. The Integration of the European Union and Domestic Political Issues. Westport, CT: Praeger Publishers, 1998.