Us Monetary Policy

In: Business and Management

Submitted By blaine
Words 1437
Pages 6
Running head: Monetary Policy:

Monetary Policy

Monetary Policy
Introduction
The objective of this paper is to study the monetary policy and its impact on the economy. Monetary policy is the process by which the Federal Reserve Bank manages the supply of money in order to influence the economy. By regulating the supply of money, the Federal Reserve Bank controls inflation and price-stability, unemployment, and economic growth. The paper also provides some insight into the creation of money.

Details The U.S. is the world’s largest economy, and such its monetary policy has widespread implications both domestic and global. The objective of the policy is to influence factors like inflation, economic output, and employment by affecting demand for goods and services. This policy is carried out by the Federal Reserve System. The Federal Reserve (the nation's central bank), consists of the Board of Governors in Washington, D.C., and 12 Federal Reserve District Banks. Although accountable to congress and structured by law, the fed is totally separate from the departments that manage the country's spending decisions. Within the Federal Reserve System is another sub agency called the Federal Open Market Committee (FOMC), which consists of the Board of Governors of the Federal Reserve System and the Reserve Bank presidents. The FOMC holds eight regularly scheduled meetings during the year, and other meetings as needed. Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy. An expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy has the goal of raising interest rates to…...

Similar Documents

Monetary Policy

...The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka C.Amarasekara 1 Abstract Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth.......

Words: 18533 - Pages: 75

Monetary Policy

...Monetary policy: Is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy. Expansionary Monetary Policy: Expansionary policy increases the total supply of money in the economy, and policy is traditionally used to combat unemployment in a recession by lowering interest rates. Contractionary Monetary Policy: Contractionary policy decreases the total money supply. and involves raising interest rates in order to combat inflation. Introduction: Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th......

Words: 2156 - Pages: 9

Monetary Policy

...What is monetary policy? The action of a central bank, currency board and other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserve). Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. Monetary Policy Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Monetary policy rests on the relationship between the rates of interest in an economy that is the price at which money can be borrowed, and the total supply of money. The official goals usually include relatively stable prices and low unemployment. The regulation of the money supply and interest rates by a Central Bank of Bangladesh in order to control inflation and stabilize currency. By impacting the effecting cost of money, the Bangladesh Bank as a controller of monetary policy can affect the amount of money that is spent by consumers and businesses. The objectives of a monetary......

Words: 1151 - Pages: 5

Monetary Policy

...to discourage dubious transactions. • Create more banks. Chit funds will die. Lack of financial inclusion. • Economists isn’t as smart as dentistry • When entrepreneurs become Angel Investors 26th April 2013 • Market surges as traders roll over bets ahead of RBI policy Punters purchase bank stocks to rake in the dividends on hopes of rate cut on 3 • Getting bank license will not be cake walk RBI’s insistence on priority lending & substantial presence in rural areas will make opening new banks difficult: Deputy Governor. 29th April 2013 • Economists see 25 bps rate cut RBI governor, who put taming inflation ahead of growth revival in the last 18 months, will take comfort from WPI falling to 3 year low in March. • Most indicators now favor equities • Markets to consolidate ahead of RBI policy • The law that can kill ponzis once & for all 30th April 2013 • Share sales to meet holding norm may suck out 15k cr As companies rush to meet SEBI’s June deadline, the secondary market may suffer fund crunch • FII inflows down to a trickle in April. • Gold price fall may not help reduce CAD (Current A/C Deficit) • Don’t relax vigil against inflation: IMF to India RBI will review its monetary policy on May 3 amid expectations that will cut rates by at least 25 bps. • Real Interest rate finally turns positive. 2nd April 2013 • India’s hydel-power crisis • India slips to second to Nielson confidence index Pessimistic economic environment caused consumer......

Words: 1555 - Pages: 7

Monetary Policy

...Monetary Policy After the IT bubble which is ended in late 2001, the recovery in the US is quite slow and economists are worry about the possible coming decline in inflation. The US started to take the aggressive monetary policy. According to chart 1, we can figure out that the target federal funds rate decline during this period. In the meantime, the low interest rate trigged the investment. A good case in point is the housing market. From the chart 2, we noticed that the housing price rising quickly during the late 1990s. Prices grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to 11 percent range from 2000 to 2003. On the other hand, the most rapid price gains were in 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent. All of this is the blasting fuse of the real estate bubble. So for this reason, many people blame the 2008 crisis for the monetary policy which is taken after the IT bubble. However, if we put two charts together, in chart 3, we can figure out some confliction between the federal funds rate and the housing price, especially during the 2004 and 2005. It seems like there is no relationship between the monetary policy and the crisis in 2008. All of this can be tell by the “Greenspan Conundrum”. The main point here is that comparing with the federal funds rate, the housing prices rely more on the long-term mortgage rate. During this year, the shot-term improved interest rate don’t generate higher......

Words: 2416 - Pages: 10

Monetary Policy

...investigates the effects of Monetary policy on some significant economic variables like exchange rate, gross domestic product and inflation using data from 1960-2010 to analyze the results. We have taken the data in percentage form. A great number of empirical studies on the relationships of monetary policy and inflation are available and most of these have analyzed the effectiveness of monetary policy in controlling inflation in Pakistan. In this paper we have presented the effectiveness of monetary policy it’s framework and data estimation through which we reached to the conclusion that monetary shocks do affect real variables like GDP, inflation and exchange rate. Pakistan has been estimated by a number of researchers and it has been recognized that monetary phenomenon are responsible for the high levels of inflation. Keywords: Monetary Policy, Inflation, Exchange rate, Economic Growth, Gross domestic product and Pakistan. Introduction This paper attempts to examine the long-run effects of Monetary Policy on several economic variables such as inflation, economic growth that is gross domestic product and exchange rate in Pakistan. For this purpose, analysis have been employed for the period 1960-2010. As monetary policy actions affect policy variables with a significant gap and with high degree of unpredictability and insecurity, it is key to predict the probable impact and degree of monetary policy actions on the real variables. Usually, policy makers and central......

Words: 2772 - Pages: 12

Monetary Policy

...the US economy back in track we need to get as much support as we can, this means that we need to use both our Monetary and fiscal policies to get back on our feet. Monetary Policy We can use the Monetary policy to lower interest rates this will help the consumer to spend more and it will make borrowing less expensive it will boost demand and employment, this will be an Expansionary monetary policy. On the other hand the exchange rate may fall which can cause imported inflation, which may increase consumer spending on imported goods and services. Another approach which I don’t recommend in our economy is a Contractionary monetary policy on this approach we will reduce the price of inflation and the interest rate will rise. When interest rates increase spending falls consumer saves more and borrow less, also the foreign exchange rate of the national currency may rise, which makes imports less expensive, and then consumers are able to buy more imports instead of home goods. Firms can cut output and employment because of the lower demand, banks will pay more to borrow from the central bank then they will have to charge a higher interest rate to their costumers making loans less attractive. There will be a reduction in capital investment by firms which will reduce their ability to increase output in the future. This will not help our current economy because higher interest rates may reduce economic growth and increase unemployment. Fiscal Policy “Fiscal policy......

Words: 873 - Pages: 4

Us Monetary Policy

... it  is   time  for  the  Fed  to  start  to  return  the  monetary  policy  back  to  normal.           In  September  of  2012,  Fed  chair  Ben  Bernanke  announced  an  indefinite  program  of   $40bn  per  month  in  asset  purchases.  Some  feared  this  quantitative  easing  would   never  come  to  an  end.  However,  under  new  chair,  the  Fed  plans  to  stop  quantitative   easing.  The  Fed’s  balance  sheet  is  around  4.4  trillion,  up  from  900  billion  before  the   crisis;  this  was  caused  by  the  bond  purchasing  .  At  this  point  in  the  economic   recovery,  the  growth  and  job  creation  has  some  momentum,  which  can  be  expected   to  continue  without  this  stimulus.  The  issue  with  this  monetary  policy  is  that  it  may   in  fact  be  creating  asset  bubbles  similar  to  those  that  contributed  to  the  financial   crisis.  Investors  search  for  returns,  and  the  Fed's  super  low  interest  rate  policy  may   have  caused  them  to  become  so  crazy  making ......

Words: 2056 - Pages: 9

Monetary Policy

...Monetary Policy in the United States: A Brave New World? Stephen D. Williamson This article is a reflection on monetary policy in the United States during Ben Bernanke’s two terms as Chairman of the Federal Open Market Committee, from 2006 to 2014. Inflation targeting, policy during the financial crisis, and post-crisis monetary policy (forward guidance and quantitative easing) are discussed and evaluated. (JEL E52, N12) Federal Reserve Bank of St. Louis Review, Second Quarter 2014, 96(2), pp. 111-21. en Bernanke chaired his last Federal Open Market Committee (FOMC) meeting in January 2014 and departed from the Board of Governors on February 3 after eight years as the head of the Federal Reserve System. So, the time is right to look back on the Bernanke era and ask how central banking has and has not changed since 2006. There is plenty in the macroeconomic record from 2006 to 2014 to keep economists and policy analysts busy for many years, so in this short piece we can only scratch the surface of what is interesting about the Bernanke era. I will focus on three issues: (i) inflation targeting, (ii) Fed lending and other interventions during the financial crisis, and (iii) post-crisis Fed policy, in particular experiments with forward guidance and quantitative easing (QE). B INFLATION TARGETING When Bernanke began his first term in 2006, I think the big change people expected was an inflation-targeting regime for U.S. monetary policy, similar to what exists in......

Words: 6247 - Pages: 25

Monetary Policy

...Give your policy recommendation with some detail, including ideas on the timing and details of normalizing policy, including exit tools. The U.S. economy is recovering from the deepest recession since the Great Depression in the 1930s. The financial crisis which started in 2007 was triggered by mismanagement of financial securities involving sub-prime residential mortgages and the bursting of a housing price bubble. The crisis spread globally with substantial deterioration in banks’ and other financial institutions’ balance sheets, a run on the shadow banking system, and the failure of many high-profile firms. In order to support the financial institutions, the Fed reacted aggressively by changing its discount rate, reserve requirements and its open market operations. • The Fed reduced the federal funds rate from 5-1/4% to effectively zero. • The fed provided of short-term liquidity to sound financial institutions, and directly to borrowers and investors. • In September 2012, the Fed also started the purchase of long term securities. The Fed was able to use the monetary policy tools available to it to implement a plan for the recovery from the financial crisis. I agree with the steps the Fed took in its response to the crisis with the exception to the treatment of TBTF institutions. I believe that bailing out TBTF institutions has created Moral Hazard. Today in 2014, the economy is back on track and the Fed planning to implement its normalizing policy. The......

Words: 1562 - Pages: 7

Monetary Policy

...Name: Suchak Sajni Sanjiv I.D Number: 630650 Lecturer: Z. Ouma Course: ECO1020 - Principles Of Macroeconomics Spring 2015 Discuss the suitability of monetary policy in stabilizing the economy. Monetary policy, to a great extent, is the management of expectations. Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks, which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). During the past two decades, maintenance of low inflation, price stability has become the principal focus of central banks around the world. At the same time, the view has emerged that monetary policy is better suited than fiscal policy for short-run stabilization purposes. Monetary decisions take into account a wider range of factors, such as: * Short-term interest rates; * Long-term interest rates; * Velocity of money through the economy; * Exchange rates; * Credit quality; * Bonds and equities (corporate ownership and debt); * Government...

Words: 2485 - Pages: 10

Monetary Policy

...of the term paper Monetary Policy Reason of publishing 04 Types of Monetary Policy 05 Monetary Policy in Bangladesh 06 Tools & Strategy of Monetary Policy 06 Major tools used by Bangladesh Bank 07 Policy Target 12 Limitations of Monetary Policy 13 Findings of the study Chapter-03 03 Scope & Objective of Monetary Policy Chapter- 02 03 14 Conclusion 14 Bibliography 14 Chapter- 01 Introduction “Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by loIring interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. In this report I tried to show that how monetary policy is related to the......

Words: 3927 - Pages: 16

Monetary Policy

...Monetary Policy ECN 201(ITV) Principles of Macroeconomics S u m m a r y In our society today money has three functions. One paramount function is money as a medium of exchange that enables us to buy and sell goods and services. Money is also a unit of account. Society needs a quantifiable measure to account for the value of goods, services, and resources. The third function of money is the store of value; where the value of current services is transferred into the future. In the aftermath of the great depression, governments of the 1930’s realized that the collapsing money supply versus credit available greatly contributed to the depression. Monetary policy is one vital tool of the national government uses to influence its economy. The British economist John Maynard Keynes analyzed, that full employment is not an automatic result of flexible pricing and sliding pay scales of economic systems. Instead it is crucial that the government relies on fiscal and monetary policy to balance demand and supply for full employment. The Federal Reserve System (Fed) consists of the Board of Governors for the Federal Reserve and the twelve Federal Reserve Banks, which control the lending activity of the nation’s banks and thrifts. The Fed controls the money supply to determine the interest rates. Monetary policy encompasses all political and economic measures available to the Central Bank for achieving their objectives, such as providing price-level stability, economic......

Words: 1661 - Pages: 7

Monetary Policy

...Fiscal and Monetary Policies essay Frank iula Mod3a 2-22-12 The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary. Fiscal Policy can be explained in many ways, for example. Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups make tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy on such macroeconomic variables as GNP and unemployment and inflation. Fiscal Policy also can be explained as the economic term which describes the behavior of governments in raising money to fund current spending and investment for collective social purposes and for transfer payments to citizens and residents of the territory for which the government is responsible. The money may be raised by taxation, by borrowing, by user charges on social assets or services,...

Words: 2795 - Pages: 12

Monetary Policy

... 3 1. Introduction 4 2.1. Expansionary Monetary Policy 5 2.2. Contractionary Monetary Policy 6 2. Overview of the United States Monetary Policy 7 2.1 Overview of Recent United States Monetary Policy 8 3. Recent (2011) Direction of Monetary Policy 10 4. Market Reaction to Monetary Policy 12 5. Conclusion 15 6. Reference List 16 1.0 Introduction In macroeconomics, monetary policy is an importance tool to Central Bank and is a policy set by the members of Central Bank. It is an economic strategy chosen by government that authorizes Central Bank to regulate and influence the economic activity by controlling the monetary base flow into national economy. The goals of monetary policy are to promote growth of the economy, stability of prices and reduce unemployment rate. Monetary policy can be classified into two categories, namely expansionary monetary policy and contractionary monetary policy. Although, the objective for the two policies is the same, they adopt different approaches in reaching this objective. Expansionary monetary policy is used when a country is facing a recession in the economy business cycle, whereby it increases the money supply in economy system to meet its objectives. In contrast, where there is a peak in the economy business cycle, central bank will use contractionary monetary policy to reduce the money supply in economy system so as to retard the......

Words: 3702 - Pages: 15