This document discusses central bank independence and its relationship to inflation. It provides background on the role of central banks and argues that independence is important to prevent political manipulation that could lead to high inflation. Central bank independence is associated with lower inflation rates. The document examines several theories for why this occurs and discusses inflation targeting as a monetary policy strategy used by independent central banks to maintain price stability over the long run.
Policy Rate, Lending Rate and Investment in Africa - A Phd proposal for defenseSamuel Agyei
The document discusses a PhD proposal on the relationship between policy rates, lending rates, and investment in Africa. It provides background on monetary policy transmission mechanisms and reviews literature on whether fiscal or monetary policy is more effective. The main channels of monetary policy transmission are discussed as the interest rate channel, credit channels, exchange rate channel, equity price channels, and expectations channel. The proposal aims to determine the main determinants of policy rates, lending rates, and deposit rates in Africa and how lending rates may affect investment.
Monetary policy involves regulating money supply and interest rates to achieve macroeconomic stability goals like low inflation and unemployment. The central bank determines monetary policy using tools that expand or contract the money supply. Expanding money supply and lowering rates stimulates demand during recessions, while contracting money and raising rates curbs demand to control inflation. Measuring indicators like money supply, inflation rates, and interest rates helps central banks determine appropriate monetary policy decisions.
The IMF has based much of it policies on a theoretical framework developed by Polak, Mundell, and Fleming over fifty years ago. Their models were based on a set of assumptions that a do not reflect the economic realities in the developing countries. The IMF’s insistence on demand management policies created policy “blind spots” that prevented it’s acknowledgment of causes of macroeconomic imbalances other than government fiscal mismanagement. There has been some movement toward reform by the Fund and better alignment with its sister organization, the World Bank. Just as the East Asian crisis momentum for change, recent events seem to have created a significant shift in the thinking of the Fund’s staff and policy analyst. The recent global crisis has caused the Fund to acknowledge the limits of monetary policy and bring fiscal policy “center stage” as an important countercyclical tool. In short, the crisis has “exposed flaws in the pre-crisis policy framework” [Carlos E. Guice, Sr.]
Economic stabilization Managerial EconomicsNethan P
This document discusses economic stabilization policies used to control business cycles and their effects. It outlines the need to control violent fluctuations in economic activity that lead to unemployment and poverty. The major goals of stabilization policies are to prevent excessive economic fluctuations and promote employment while encouraging free enterprise. The two main policies discussed are fiscal policy, which uses government spending, taxation and borrowing, and monetary policy which controls money supply and interest rates through tools like open market operations, bank rates, and cash reserve ratios. The document concludes that an appropriate mix of fiscal and monetary policies is most effective at stabilizing the economy.
Financial Development and Economic Growth Nexus in Nigeriaiosrjce
The study assessed the impact of financial development on economic growth in Nigeria using time
series data from 1970 to 2012. The Autoregressive Distributed Lag bounds testing approach to cointegration
was utilized for this study. The result from the ARDL model indicate that the variables for this study are
cointegrated while the error correction term appeared significant and confirms that short-run disequilibria are
corrected up to about 50 percent annually. The empirical results reveals that financial development exerts
positive and significant impact on economic growth in the long-run while trade liberalization variables exert
negative impact on economic growth in the long-run indicating non-competitive nature of non-oil domestic
products in the international market. In the short-run, domestic credit is insignificant which indicates a dearth
of investible funds in the economy. There is evidence that financial development policies influence economic
growth in the long-run and not in the short-run. This study among others recommends the urgent need to
implement policies that will strengthen the deposit mobilization and intermediation efforts in the banking system
in other to deepen the financial system. Nigerian trade performance should be improved through economic
diversification and further availability of funds to private sector at competitive interest rate in order to produce
internationally competitive products.
Monetary policy aims to control inflation and stabilize prices in Nigeria. The study uses data from 1981-2008 to examine the impact of inflation and monetary policy on economic growth. The results show that while money supply is positively related to economic growth, inflation rate has no significant impact. This suggests that monetary policy alone cannot control inflation in Nigeria and should be supplemented with fiscal and other measures. The Central Bank of Nigeria needs a more transparent monetary policy to better manage expectations and address the inertia of inflation.
The document provides an overview of monetary policy, including:
- Monetary policy uses tools like interest rates and money supply to influence economic growth, inflation, and unemployment.
- Expansionary policy lowers interest rates to reduce unemployment during recessions, while contractionary policy raises rates to reduce inflation.
- Central banks implement monetary policy and use tools like open market operations, reserve requirements, and interest rates to influence the money supply.
- The goal of monetary policy is usually price stability and low unemployment.
Monetary policy aims to control the money supply and credit in an economy to achieve objectives like full employment, investment growth, price stability, and balanced trade. Central banks use quantitative tools like bank rates, open market operations, and reserve requirements as well as qualitative tools like margin requirements and moral persuasion to influence monetary conditions. Economic indicators provide statistical data on the current state of the economy and can be leading, coincident, or lagging based on whether they change before, with, or after the overall economy. Coincident indicators reflect present conditions while leading indicators predict future performance and lagging indicators trail overall economic changes.
Policy Rate, Lending Rate and Investment in Africa - A Phd proposal for defenseSamuel Agyei
The document discusses a PhD proposal on the relationship between policy rates, lending rates, and investment in Africa. It provides background on monetary policy transmission mechanisms and reviews literature on whether fiscal or monetary policy is more effective. The main channels of monetary policy transmission are discussed as the interest rate channel, credit channels, exchange rate channel, equity price channels, and expectations channel. The proposal aims to determine the main determinants of policy rates, lending rates, and deposit rates in Africa and how lending rates may affect investment.
Monetary policy involves regulating money supply and interest rates to achieve macroeconomic stability goals like low inflation and unemployment. The central bank determines monetary policy using tools that expand or contract the money supply. Expanding money supply and lowering rates stimulates demand during recessions, while contracting money and raising rates curbs demand to control inflation. Measuring indicators like money supply, inflation rates, and interest rates helps central banks determine appropriate monetary policy decisions.
The IMF has based much of it policies on a theoretical framework developed by Polak, Mundell, and Fleming over fifty years ago. Their models were based on a set of assumptions that a do not reflect the economic realities in the developing countries. The IMF’s insistence on demand management policies created policy “blind spots” that prevented it’s acknowledgment of causes of macroeconomic imbalances other than government fiscal mismanagement. There has been some movement toward reform by the Fund and better alignment with its sister organization, the World Bank. Just as the East Asian crisis momentum for change, recent events seem to have created a significant shift in the thinking of the Fund’s staff and policy analyst. The recent global crisis has caused the Fund to acknowledge the limits of monetary policy and bring fiscal policy “center stage” as an important countercyclical tool. In short, the crisis has “exposed flaws in the pre-crisis policy framework” [Carlos E. Guice, Sr.]
Economic stabilization Managerial EconomicsNethan P
This document discusses economic stabilization policies used to control business cycles and their effects. It outlines the need to control violent fluctuations in economic activity that lead to unemployment and poverty. The major goals of stabilization policies are to prevent excessive economic fluctuations and promote employment while encouraging free enterprise. The two main policies discussed are fiscal policy, which uses government spending, taxation and borrowing, and monetary policy which controls money supply and interest rates through tools like open market operations, bank rates, and cash reserve ratios. The document concludes that an appropriate mix of fiscal and monetary policies is most effective at stabilizing the economy.
Financial Development and Economic Growth Nexus in Nigeriaiosrjce
The study assessed the impact of financial development on economic growth in Nigeria using time
series data from 1970 to 2012. The Autoregressive Distributed Lag bounds testing approach to cointegration
was utilized for this study. The result from the ARDL model indicate that the variables for this study are
cointegrated while the error correction term appeared significant and confirms that short-run disequilibria are
corrected up to about 50 percent annually. The empirical results reveals that financial development exerts
positive and significant impact on economic growth in the long-run while trade liberalization variables exert
negative impact on economic growth in the long-run indicating non-competitive nature of non-oil domestic
products in the international market. In the short-run, domestic credit is insignificant which indicates a dearth
of investible funds in the economy. There is evidence that financial development policies influence economic
growth in the long-run and not in the short-run. This study among others recommends the urgent need to
implement policies that will strengthen the deposit mobilization and intermediation efforts in the banking system
in other to deepen the financial system. Nigerian trade performance should be improved through economic
diversification and further availability of funds to private sector at competitive interest rate in order to produce
internationally competitive products.
Monetary policy aims to control inflation and stabilize prices in Nigeria. The study uses data from 1981-2008 to examine the impact of inflation and monetary policy on economic growth. The results show that while money supply is positively related to economic growth, inflation rate has no significant impact. This suggests that monetary policy alone cannot control inflation in Nigeria and should be supplemented with fiscal and other measures. The Central Bank of Nigeria needs a more transparent monetary policy to better manage expectations and address the inertia of inflation.
The document provides an overview of monetary policy, including:
- Monetary policy uses tools like interest rates and money supply to influence economic growth, inflation, and unemployment.
- Expansionary policy lowers interest rates to reduce unemployment during recessions, while contractionary policy raises rates to reduce inflation.
- Central banks implement monetary policy and use tools like open market operations, reserve requirements, and interest rates to influence the money supply.
- The goal of monetary policy is usually price stability and low unemployment.
Monetary policy aims to control the money supply and credit in an economy to achieve objectives like full employment, investment growth, price stability, and balanced trade. Central banks use quantitative tools like bank rates, open market operations, and reserve requirements as well as qualitative tools like margin requirements and moral persuasion to influence monetary conditions. Economic indicators provide statistical data on the current state of the economy and can be leading, coincident, or lagging based on whether they change before, with, or after the overall economy. Coincident indicators reflect present conditions while leading indicators predict future performance and lagging indicators trail overall economic changes.
This document provides an overview of monetary policy and inflation in Pakistan. It discusses key topics such as:
1) The different stages and types of inflation including creeping, walking, running, and hyper inflation.
2) The causes of inflation including demand-pull and cost-push factors.
3) The objectives, instruments and how monetary policy differs from fiscal policy in Pakistan.
4) The instruments of monetary policy used by the State Bank of Pakistan to control inflation including bank rate, cash reserve ratio, open market operations, and others.
This document summarizes a study on the relationship between financial development and economic growth in emerging market economies. The study uses empirical analysis through fixed effects regression models to examine how various financial development indicators, such as private credit levels, banking system assets, liquid liabilities, and stock market capitalization, impact per capita GDP growth in 27 emerging markets from 1960 to 2011. The results suggest that financial development can promote economic growth through indirect benefits, and several financial indicators were found to have a significant positive relationship with economic growth in the countries studied, including India. However, policies are needed to manage risks from financial openness and ensure credit quality.
Monetary policy controls the supply of money in a country through tools like interest rates and money supply targets. The goals are usually stable prices and low unemployment. There are two types of monetary policy - expansionary increases money supply to boost a slowing economy, while contractionary decreases supply to curb inflation by raising rates. Key indicators like inflation, interest rates, cash reserve ratios that the Reserve Bank of India monitors and changes to impact money supply.
This document discusses stabilization policy and the ability of governments to reduce business fluctuations through fiscal and monetary policy. It covers topics such as:
- How monetary policy can be implemented through changing money supply or interest rates, and how fiscal policy can be implemented through changing government spending or taxes.
- Objections to the effectiveness of fiscal stabilization policy, including the automatic stabilizer effect, Ricardian equivalence principle, and crowding out effect.
- The inflation-output tradeoff described by the Phillips curve and how expansionary policies can increase inflation in the long run.
- How inflation expectations impact the Phillips curve and the ability of governments to permanently affect unemployment through demand policies alone.
- The importance of
9 financial-sector-development-and-poverty-reductionAwais e Siraj
This document discusses the relationship between financial sector development and poverty reduction. It argues that financial sector development is an effective way to reduce poverty through four main avenues: improving efficiency, increasing access and range of services, improving regulation, and increasing access for more of the population. The financial sector is divided into four parts for analysis: banking, insurance, stock markets, and bond markets. Variables are identified to measure development in each sector. The study aims to analyze the relationship between financial sector development and poverty across different countries. Financial sector development leads to growth, which then reduces poverty, demonstrating a negative relationship between financial sector development and poverty.
This document provides information on monetary, fiscal, and budgetary policies. It discusses:
- Monetary policy and how central banks use tools like interest rates and reserves to influence money supply and economic growth.
- Fiscal policy and the types of expansionary and contractionary fiscal policy used to influence aggregate demand.
- Government budgets, deficits, and how fiscal policy is funded through taxation, borrowing, prior surpluses, or other means.
- The history and instruments of monetary policy, types of fiscal policy, and how monetary and fiscal policies can be used to influence inflation and unemployment.
The document discusses the roles and monetary policy of the State Bank of Vietnam. It outlines the bank's main roles as promoting monetary stability, supervising financial institutions, and providing banking facilities. It also discusses the bank's goals of maintaining external and internal balance through managing foreign exchange rates and keeping inflation within a target band. The bank uses open market operations and manages interest rates and money supply to influence economic activity and prices.
Monetary policy aims to manage a country's money supply and interest rates to achieve goals like low inflation and full employment. The document discusses the objectives, tools, and transmission mechanisms of monetary policy. It also provides examples of monetary policy in Pakistan between 2000-2014, noting the SBP has used tools like adjusting policy rates and reserve requirements in response to economic conditions like inflation, growth, and balance of payments. The challenges facing Pakistan's monetary policy are also summarized.
In this paper we try to estimate effects of financial deepness and capital account liberalization on economic growth, investment and the total factor productivity (TFP) in Slovenia from 1993 to the second quarter of 2001. We find out that the only positive effect of capital account liberalization was increased credits to private sector. On the other hand, financial depth has a positive and significant effect on economic growth and investment, but not on the TFP growth. Moreover, it is not likely that also capital account liberalization positively affects above specified choice variables. Namely, financial deepening is achieved through development of adequate institutions and sustainable macroeconomic policies. Once financial system is set in the country, capital account liberalization takes place.
The effects of monetary policy on inflation in ghana.Alexander Decker
This document summarizes a study on the effects of monetary policy on inflation in Ghana. The study used annual data from 1985 to 2009 to estimate a model relating the interest rate, exchange rate, and money supply to inflation. The results showed a long-run positive relationship between money supply and inflation, and a negative relationship between interest rate and inflation, but a positive relationship between exchange rate and inflation. The study recommends that monetary policy alone should not be used to control inflation and that fiscal and other non-monetary measures are also needed.
Monetary policy determines the supply and availability of money in an economy in order to achieve objectives like economic growth and price stability. It is implemented by central banks and involves managing interest rates and the money supply. When the economy is slowing, monetary policy aims to increase the money supply and lower rates to boost aggregate demand. When inflation is high, it seeks to tighten the money supply or raise rates to reduce aggregate spending. The goals are macroeconomic stability with low unemployment and inflation alongside steady growth.
this presentation is currently have this upload set to Public. This means that it will be indexed by search engines and view able by anyone on the web.
The document summarizes India's monetary policy. It discusses the goals of monetary policy as achieving low and stable inflation while promoting economic growth. It outlines the various interest rates set by the Reserve Bank of India and tools used to regulate money supply such as cash reserve ratio and statutory liquidity ratio. While monetary policy can help reduce inflation and stabilize the economy, it has limitations in predicting inflationary pressures and ensuring long-term growth. The document concludes by emphasizing the need for monetary policy to support agricultural growth, infrastructure development, and other priorities to ensure inclusive development.
Monetary, Fiscal and Income policy – Meaning and instrumentsviveksangwan007
Monetary policy and fiscal policy are the two main tools used by governments to influence economic activity. Monetary policy involves managing interest rates and money supply through a central bank like India's RBI, while fiscal policy involves taxing and spending decisions made by governments. Both tools can be used to stimulate or restrict economic growth. Monetary policy focuses on monetary measures while fiscal policy centers on taxation and expenditures. Together, these policies have a significant impact on a nation's economy.
The document is a study guide containing questions about macroeconomic concepts related to fiscal and monetary policy, government budgets, debt, and central banking. It tests understanding of topics like the federal budget balance, cyclically adjusted budget balance, debt-to-GDP ratio, crowding out effect, and tools of monetary policy like open market operations and the federal funds rate.
The document discusses monetary policy and its objectives and tools. The objectives of monetary policy are to ensure economic stability, achieve price stability by controlling inflation and deflation, and promote economic growth. The key tools of monetary policy are quantitative measures like open market operations, cash reserve ratio, and discount rate. Qualitative measures include credit rationing, changing lending margins, moral suasion, and direct controls. Monetary policy uses various tools to contract the money supply and credit to control inflation or expand the money supply and credit to control recession.
This document discusses the role of central banks in the economy. It begins by outlining the main criteria for a central bank's role, including price stability, independence, accountability, and transparency. It then examines some of the most influential central banks such as the US Federal Reserve, European Central Bank, and Bank of England. While central banks aim to be independent, they are still overseen by governments and can be subjected to political interference. The effectiveness of central banks varies between developed and developing economies.
This document summarizes the key aspects of monetary policy in Bangladesh. It discusses how the central bank uses interest rates and money supply to influence inflation. However, monetary policy faces limitations in Bangladesh due to imperfect markets and the economy's reliance on imports. The transmission of interest rate changes is also weak as banks determine rates collusively. While price stability is ideal, monetary policy alone has limited impact on inflation in Bangladesh given global price influences and excess bank liquidity reducing the central bank's policy instruments.
This document discusses a study examining the relationship between banking sector development and economic growth in Lebanon from 1992-2011. The study uses regression analysis to test whether greater banking sector development, as represented by factors like private credit levels and banking efficiency, leads to increased economic growth. Preliminary analysis includes a Granger causality test to determine the direction of the relationship between financial development and GDP growth. Key banking sector variables analyzed are private credit levels, interest rate spreads, banking assets, concentration levels, and deposit growth rates. The goal is to evaluate how Lebanon's banking-centered financial system impacts economic activity and development.
The document discusses monetary and fiscal policies used to address inflation. It defines inflation and describes its stages and types. The causes of demand-pull and cost-push inflation are explained. Effects of inflation and instruments of monetary policy like bank rate, cash reserve ratio, and open market operations are summarized. Key differences between monetary and fiscal policy are highlighted. Objectives of monetary policy to maintain price stability and credit flow are stated.
Macroeconomic effects of central bank independence and transparency the case ...Alexander Decker
This document summarizes a journal article that investigates the impact of central bank independence and transparency on macroeconomic variables in Nigeria. It provides background on how Nigeria established an independent central bank in 2007 and aimed to adopt inflation targeting in 2009. The study examines how periods of central bank interference versus autonomy impacted selected macroeconomic variables from 1970 to 2011. It analyzes the effects of central bank independence and transparency on employment, inflation, and interest rates in Nigeria's economy.
The monetary system of Nepal shows a dualistic nature, with the urban economy integrated into organized industries and services, while the rural economy remains mostly subsistence-based. Historically, Nepal Bank Ltd. and Rastriya Banijya Bank played important roles in Nepal's money market. The Nepal Rastra Bank was established as the central bank in 1956 and took a decade to consolidate its power and regulate banking operations, while other institutions like NIDC and ADB were also set up to provide financing.
This document provides an overview of monetary policy and inflation in Pakistan. It discusses key topics such as:
1) The different stages and types of inflation including creeping, walking, running, and hyper inflation.
2) The causes of inflation including demand-pull and cost-push factors.
3) The objectives, instruments and how monetary policy differs from fiscal policy in Pakistan.
4) The instruments of monetary policy used by the State Bank of Pakistan to control inflation including bank rate, cash reserve ratio, open market operations, and others.
This document summarizes a study on the relationship between financial development and economic growth in emerging market economies. The study uses empirical analysis through fixed effects regression models to examine how various financial development indicators, such as private credit levels, banking system assets, liquid liabilities, and stock market capitalization, impact per capita GDP growth in 27 emerging markets from 1960 to 2011. The results suggest that financial development can promote economic growth through indirect benefits, and several financial indicators were found to have a significant positive relationship with economic growth in the countries studied, including India. However, policies are needed to manage risks from financial openness and ensure credit quality.
Monetary policy controls the supply of money in a country through tools like interest rates and money supply targets. The goals are usually stable prices and low unemployment. There are two types of monetary policy - expansionary increases money supply to boost a slowing economy, while contractionary decreases supply to curb inflation by raising rates. Key indicators like inflation, interest rates, cash reserve ratios that the Reserve Bank of India monitors and changes to impact money supply.
This document discusses stabilization policy and the ability of governments to reduce business fluctuations through fiscal and monetary policy. It covers topics such as:
- How monetary policy can be implemented through changing money supply or interest rates, and how fiscal policy can be implemented through changing government spending or taxes.
- Objections to the effectiveness of fiscal stabilization policy, including the automatic stabilizer effect, Ricardian equivalence principle, and crowding out effect.
- The inflation-output tradeoff described by the Phillips curve and how expansionary policies can increase inflation in the long run.
- How inflation expectations impact the Phillips curve and the ability of governments to permanently affect unemployment through demand policies alone.
- The importance of
9 financial-sector-development-and-poverty-reductionAwais e Siraj
This document discusses the relationship between financial sector development and poverty reduction. It argues that financial sector development is an effective way to reduce poverty through four main avenues: improving efficiency, increasing access and range of services, improving regulation, and increasing access for more of the population. The financial sector is divided into four parts for analysis: banking, insurance, stock markets, and bond markets. Variables are identified to measure development in each sector. The study aims to analyze the relationship between financial sector development and poverty across different countries. Financial sector development leads to growth, which then reduces poverty, demonstrating a negative relationship between financial sector development and poverty.
This document provides information on monetary, fiscal, and budgetary policies. It discusses:
- Monetary policy and how central banks use tools like interest rates and reserves to influence money supply and economic growth.
- Fiscal policy and the types of expansionary and contractionary fiscal policy used to influence aggregate demand.
- Government budgets, deficits, and how fiscal policy is funded through taxation, borrowing, prior surpluses, or other means.
- The history and instruments of monetary policy, types of fiscal policy, and how monetary and fiscal policies can be used to influence inflation and unemployment.
The document discusses the roles and monetary policy of the State Bank of Vietnam. It outlines the bank's main roles as promoting monetary stability, supervising financial institutions, and providing banking facilities. It also discusses the bank's goals of maintaining external and internal balance through managing foreign exchange rates and keeping inflation within a target band. The bank uses open market operations and manages interest rates and money supply to influence economic activity and prices.
Monetary policy aims to manage a country's money supply and interest rates to achieve goals like low inflation and full employment. The document discusses the objectives, tools, and transmission mechanisms of monetary policy. It also provides examples of monetary policy in Pakistan between 2000-2014, noting the SBP has used tools like adjusting policy rates and reserve requirements in response to economic conditions like inflation, growth, and balance of payments. The challenges facing Pakistan's monetary policy are also summarized.
In this paper we try to estimate effects of financial deepness and capital account liberalization on economic growth, investment and the total factor productivity (TFP) in Slovenia from 1993 to the second quarter of 2001. We find out that the only positive effect of capital account liberalization was increased credits to private sector. On the other hand, financial depth has a positive and significant effect on economic growth and investment, but not on the TFP growth. Moreover, it is not likely that also capital account liberalization positively affects above specified choice variables. Namely, financial deepening is achieved through development of adequate institutions and sustainable macroeconomic policies. Once financial system is set in the country, capital account liberalization takes place.
The effects of monetary policy on inflation in ghana.Alexander Decker
This document summarizes a study on the effects of monetary policy on inflation in Ghana. The study used annual data from 1985 to 2009 to estimate a model relating the interest rate, exchange rate, and money supply to inflation. The results showed a long-run positive relationship between money supply and inflation, and a negative relationship between interest rate and inflation, but a positive relationship between exchange rate and inflation. The study recommends that monetary policy alone should not be used to control inflation and that fiscal and other non-monetary measures are also needed.
Monetary policy determines the supply and availability of money in an economy in order to achieve objectives like economic growth and price stability. It is implemented by central banks and involves managing interest rates and the money supply. When the economy is slowing, monetary policy aims to increase the money supply and lower rates to boost aggregate demand. When inflation is high, it seeks to tighten the money supply or raise rates to reduce aggregate spending. The goals are macroeconomic stability with low unemployment and inflation alongside steady growth.
this presentation is currently have this upload set to Public. This means that it will be indexed by search engines and view able by anyone on the web.
The document summarizes India's monetary policy. It discusses the goals of monetary policy as achieving low and stable inflation while promoting economic growth. It outlines the various interest rates set by the Reserve Bank of India and tools used to regulate money supply such as cash reserve ratio and statutory liquidity ratio. While monetary policy can help reduce inflation and stabilize the economy, it has limitations in predicting inflationary pressures and ensuring long-term growth. The document concludes by emphasizing the need for monetary policy to support agricultural growth, infrastructure development, and other priorities to ensure inclusive development.
Monetary, Fiscal and Income policy – Meaning and instrumentsviveksangwan007
Monetary policy and fiscal policy are the two main tools used by governments to influence economic activity. Monetary policy involves managing interest rates and money supply through a central bank like India's RBI, while fiscal policy involves taxing and spending decisions made by governments. Both tools can be used to stimulate or restrict economic growth. Monetary policy focuses on monetary measures while fiscal policy centers on taxation and expenditures. Together, these policies have a significant impact on a nation's economy.
The document is a study guide containing questions about macroeconomic concepts related to fiscal and monetary policy, government budgets, debt, and central banking. It tests understanding of topics like the federal budget balance, cyclically adjusted budget balance, debt-to-GDP ratio, crowding out effect, and tools of monetary policy like open market operations and the federal funds rate.
The document discusses monetary policy and its objectives and tools. The objectives of monetary policy are to ensure economic stability, achieve price stability by controlling inflation and deflation, and promote economic growth. The key tools of monetary policy are quantitative measures like open market operations, cash reserve ratio, and discount rate. Qualitative measures include credit rationing, changing lending margins, moral suasion, and direct controls. Monetary policy uses various tools to contract the money supply and credit to control inflation or expand the money supply and credit to control recession.
This document discusses the role of central banks in the economy. It begins by outlining the main criteria for a central bank's role, including price stability, independence, accountability, and transparency. It then examines some of the most influential central banks such as the US Federal Reserve, European Central Bank, and Bank of England. While central banks aim to be independent, they are still overseen by governments and can be subjected to political interference. The effectiveness of central banks varies between developed and developing economies.
This document summarizes the key aspects of monetary policy in Bangladesh. It discusses how the central bank uses interest rates and money supply to influence inflation. However, monetary policy faces limitations in Bangladesh due to imperfect markets and the economy's reliance on imports. The transmission of interest rate changes is also weak as banks determine rates collusively. While price stability is ideal, monetary policy alone has limited impact on inflation in Bangladesh given global price influences and excess bank liquidity reducing the central bank's policy instruments.
This document discusses a study examining the relationship between banking sector development and economic growth in Lebanon from 1992-2011. The study uses regression analysis to test whether greater banking sector development, as represented by factors like private credit levels and banking efficiency, leads to increased economic growth. Preliminary analysis includes a Granger causality test to determine the direction of the relationship between financial development and GDP growth. Key banking sector variables analyzed are private credit levels, interest rate spreads, banking assets, concentration levels, and deposit growth rates. The goal is to evaluate how Lebanon's banking-centered financial system impacts economic activity and development.
The document discusses monetary and fiscal policies used to address inflation. It defines inflation and describes its stages and types. The causes of demand-pull and cost-push inflation are explained. Effects of inflation and instruments of monetary policy like bank rate, cash reserve ratio, and open market operations are summarized. Key differences between monetary and fiscal policy are highlighted. Objectives of monetary policy to maintain price stability and credit flow are stated.
Macroeconomic effects of central bank independence and transparency the case ...Alexander Decker
This document summarizes a journal article that investigates the impact of central bank independence and transparency on macroeconomic variables in Nigeria. It provides background on how Nigeria established an independent central bank in 2007 and aimed to adopt inflation targeting in 2009. The study examines how periods of central bank interference versus autonomy impacted selected macroeconomic variables from 1970 to 2011. It analyzes the effects of central bank independence and transparency on employment, inflation, and interest rates in Nigeria's economy.
The monetary system of Nepal shows a dualistic nature, with the urban economy integrated into organized industries and services, while the rural economy remains mostly subsistence-based. Historically, Nepal Bank Ltd. and Rastriya Banijya Bank played important roles in Nepal's money market. The Nepal Rastra Bank was established as the central bank in 1956 and took a decade to consolidate its power and regulate banking operations, while other institutions like NIDC and ADB were also set up to provide financing.
The Relationship between Financial Structure and GDP.Stefano Valeri
This document analyzes the relationship between different financial structures and GDP levels across countries. It identifies three main types of financial systems: bank-based, market-based, and government-based. These systems are characterized by five factors: solvency, profitability, market efficiency, foreign presence, and core revenue/cost structure. The document uses factor analysis to develop indexes for these factors. It then performs cluster analysis to group countries into the three financial system types. Finally, it uses regression analysis to test if each system type is related to GDP levels, finding that only market-oriented systems are strongly related to economic development as measured by GDP.
Independent central banks control monetary policy without direct oversight from elected officials, raising concerns about democratic accountability. Most experts argue low and stable inflation requires delegating monetary powers due to time inconsistency problems and governments' tendency to pursue short-term goals. Central banks have some independence over goals, targets, and instruments but remain accountable through reporting requirements and the ability of elected bodies to intervene in extreme cases. Transparency and coordination between central banks and governments balances economic efficiency with democratic values.
Financialization, Rentier Interests, and Central Bank PolicyConor McCabe
Financialization, Rentier Interests, and Central Bank Policy
Gerald Epstein
Department of Economics and Political Economy Research Institute (PERI)
University of Massachusetts, Amherst
December, 2001; this version, June, 2002
Fiscal policy involves manipulating government spending and taxation to influence macroeconomic variables like GDP and unemployment. It can be expansionary by cutting taxes and increasing spending, or contractionary by raising taxes and reducing spending. While fiscal policy aims to stabilize the economy, it faces limitations like time lags between policy changes and economic impacts, difficulty in fine-tuning the economy, and issues financing large budget deficits from expansionary policies.
This document discusses fiscal policy and macroeconomic stability. It begins by providing background on fiscal policy and how governments can influence economic activity through public expenditure, taxes, and borrowing. It then explains how fiscal policy that increases government spending can be expansionary, while reductions in spending are contractionary. The goals of fiscal policy include macroeconomic stabilization in the short-run and fostering growth and reducing poverty through supply-side policies in the long-run. It concludes by discussing the importance of macroeconomic stability for sustained growth and provides examples from the Eurozone convergence criteria.
2. IB UNIT 3 - INTERNATIONAL MONETARY SYSTEM .pptxShudhanshuBhatt1
This PPT deals with
The International Monetary System which refers to the framework of rules, institutions, and procedures that govern international financial transactions and exchange rate arrangements among countries.
The document provides information about monetary policy and fiscal policy. It defines monetary policy as actions by a central bank that determine the money supply and interest rates. It discusses the objectives, tools, and limitations of both monetary policy and fiscal policy. Monetary policy tools include interest rates, reserve requirements, and open market operations. Fiscal policy tools include taxation, government spending, and public debt. Both policies aim to achieve objectives like price stability and economic growth but face challenges like time lags and crowding out effects.
This document provides an introduction to macroeconomics. It discusses key macroeconomic concepts such as stocks and flows, equilibrium and disequilibrium, and the circular flow of income in closed and open economies. It also outlines macroeconomic goals like full employment and price stability. The development of macroeconomics from classical to Keynesian and monetarist theories is summarized. Finally, it discusses important macroeconomic indicators and policy tools like fiscal and monetary policy.
The Federal Reserve System was established in 1913 to serve as the central bank of the United States. It aims to maintain stable prices and full employment through its control of monetary policy. The Fed influences monetary conditions in the economy by regulating the money supply and interest rates. It also supervises and regulates banks to ensure the safety and soundness of the financial system. The Federal Reserve System is made up of 12 regional Federal Reserve Banks and the Board of Governors in Washington D.C.
The role of fiscal policy and central bankAnurag Bhusal
Fiscal policy and central banks play important roles in managing a nation's economy. Fiscal policy involves government spending and tax policies to influence macroeconomic indicators like employment, inflation and growth. Central banks implement monetary policy by adjusting interest rates and money supply to maintain price stability and economic growth. While both tools aim to boost aggregate demand, fiscal policy can directly target specific groups, and has a faster effect, but also risks creating large deficits. Central banks issue currency, act as lenders of last resort, and set monetary policy to achieve objectives like low inflation. Since the 2008 crisis, central banks have taken on more stimulus roles.
Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.
1. Public finance involves the study of government spending, taxation, and deficits. It examines when and how governments should intervene in markets and the potential outcomes of policy changes.
2. Understanding how government actions affect the economy is important for public finance professionals. Government interventions aim to improve economic efficiency, distribute income, and stabilize macroeconomic conditions.
3. The scope of public finance includes analyzing public revenue, expenditure, debt, financial administration, and economic stabilization policies. It also involves allocating public goods, redistributing income, and reducing economic fluctuations through fiscal policy tools.
Central banks use three main tools to conduct monetary policy: open market operations, changes to the discount rate, and changes to reserve requirements. Open market operations are the most important tool as they directly impact interest rates and the monetary base. The goals of monetary policy include price stability, economic growth, and high employment, though occasionally these goals can conflict in the short run. Central banks set targets for variables like inflation and GDP growth that are more directly influenced by their policy tools and can help achieve their broader economic and financial stability goals over time.
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS .docxsmile790243
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS 1
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS 2
Milestone Two
Macroeconomic Focus and Industry Analysis
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Macroeconomic Focus and Industry Analysis
Macroeconomic forecast of the monetary school of thought.
From a monetarist perspective, regulation of the flow and circulation of money is important in determining and influencing preferred economic conditions in the United States. Reducing the circulation of money in the economy has many effects on the macroeconomic environment and determines the activities of other stakeholders in the financial market. From a monetarist school of thought, the government has sole responsibility to both country and citizens in ensuring favorable monetary policies are implemented that are akin to the prevailing economic conditions through the control of inflation and prevention of deflation in the country (Fair, 2011).
Reducing the supply of money in the economy has effects on the macro-economic Cory Kanth:
This point is not clear. It needs clarification in terms of better explanation.
environment as earlier mentioned. Reducing money circulation has both short run and a long run effect that shift practices in the economic environment. For instance, consumer spending is affected by the implementation of monetary policies. When the government implements monetary policies that do not favor money circulation, consumer spending capabilities are significantly reduced (Fair, 2011). The reduction in the spending is due to the reduced flow of money in the financial market which limits the funds accessible to consumers in the market. This policy is usually exercised in a bid to control inflation in the market where prices go up due to increased demand catalyzed by the availability of money in the hands of the spenders.
Reducing the growth of money circulation from a monetary perspective is empirical in determining the cost of labor. When there is a circulation of money in the market, individuals can opt for willing unemployment due to the availability of funds through other sources other than the low paying jobs (Gnimassoun & Mignon, 2015). Further analysis on the effect of reducing money circulation is the government stabilizes the prices of labor meaning little choice is left for personnel who may discriminate employment due to reduced wages or low salaries.
Investment spending is a factor directly affected by the increase in interest rates. This is because investors avoid high lending rates due to high interests that are amassed over operational periods. Moreover, increased lending rates affect investment spending since capital and ...
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Central Bank Independence
Introduction
Macroeconomics is a crucial factor in every country’s economy since it monitors the
performance, structure, decision making and behavior of the economy. To be able to understand
the function of the economy then economists must study elements of economics such as; price
indices, GDP, and unemployment rates; this will be important in elaborating national income,
savings, consumption, investment, international trade, unemployment, output, international
finance, and more importantly inflation (Wang, p.2). Most of these functions are entrusted to the
central bank which seeks autonomy so as to effectively work everything out.
The central bank is mandated with implementing monetary policies, checking interest
rates, controlling the supply of money, banks for the government and acts as the lender of last
resort, administer foreign exchange, gold reserves, and the stock register, it supervises and
regulates the banking sector and establishes the interest rates so as to manage exchange rates and
inflation (Eijffinger, & Haan, p.3). Without independence these tasks will be manipulated to suit
individual government or political needs hence plunge the country into financial catastrophe.
As cited by Alesina, & Summers, p.151 in the article “Central Bank Independence and
Macroeconomic Performance: Some Comparative Evidence” Central Bank’s independence is
different based on each countries policies; they also indicate that the more independent Central
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banks are the lower the levels of inflation. Central bank is also associated with such economic
indictors such as growth, interest rates and unemployment while it generally upholds price
stability.
The paper focuses on microeconomics especially on central bank independence and it
advantages and disadvantages. It also consist of a review and critique of 5 articles related to the
topic areas of macroeconomics and chosen from the Federal Reserve publications of the 12
different Federal Reserve District Banks over the period 2004-2010. It specifically tackles the
topic on inflation and its relation to central bank independence. The two article used in the paper
that are not in the 2004 – 2010 year bracket have been used to give a clear understanding on
inflation and central bank independence. The two articles are Eijffinger, & Haan, in the working
paper ‘The Political Economy of Central Bank Independence’ and Alesina, & Summers, in the
article “Central Bank Independence and Macroeconomic Performance: Some Comparative
Evidence”.
The independence of central bank
Independence indicates that central bank is free from any political, legislative, or
executive control of the government. It also indicates that it is free from private or groups control
in that it never serves the interest of few individuals but rather the whole nation. It should
therefore be free to undertake its mandate without external pressure that may stall economic
progress and monitoring (Alesina, & Summers, p.152).
The most sensitive role of central bank of producing currency or money for a country
emphasizes the very fact that it should be autonomous in that it should not be controlled by any
elected persons rather than professionals with the interest of the country at heart. This will avoid
manipulation of the central bank operations for short term political ambitions. Accountability is
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stressed in all its operations so that its operations of monetary policy and price stability objective
can be attained without prejudice.
When the power to create money is merged with the power to spend there is possible
misuse and abuse of the power to create money. This can be seen where governments control the
central bank where more money is printed during election periods which boosts employment and
spending in the short term but the nation crunch into high inflation afterwards in the long term
(Alesina, & Summers, p.152). With the separation of the power to spend and power to create
money this is avoided. This means that no political or selfish interest will be served.
Central bank base its policies on the long term and this helps in attaining future growth
since no policy is compromised to suit political interests. The professionals operate on the long
term and thus decisions on interest rates and money matters are made appropriately on the
mandate that will benefit the society Eijffinger, & Haan, p.11. Central bank independence has
been associated with low inflation rates and lower long term budget deficits.
Despite the benefits of autonomy of central bank it can be negative in that it forms an
overall economic policy and thus no clear separation of other policies such as the fiscal,
monetary, labor and trade. This may lead to conflict of objectives which may lead to harming the
economy (Alesina, & Summers, p.154). Democracy has also made independence of central bank
compromised since it dictates that there is need for accountability to elected leaders and hence in
one way or the other central bank must be controlled by the legislature.
For central bank to remain independent there must be a comprehensive legal and
operational structure that outlines the monetary structure that should be followed; this should be
devoid of any misconceptions or conflicts to ensure a smooth running (Eijffinger, & Haan, p.13).
Transparency is also required from the bank. Continuous updates to government and public is
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necessary that will be proof of accountability in all departments. The public will also be able to
assess the progress and helps in gaining confidence in the bank and the monetary policy.
An effective institutional framework that ensures decisions on the monetary policy are
made and implemented effectively and without any interference from political entities. The
decisions to be made and implemented include; functional independence (right to make decisions
on monetary policy and price stability), personnel independence (including free selection of the
board of trustees), instrumental independence (control of all elements of inflation such as
preventing financing of government insufficiency) and financial independence (that ensures
central bank has adequate finances for it to control its own full budget) (Alesina, & Summers,
p.155).
Inflation Targeting and Central Bank
Research has indicated that where there is an independent central bank there are lower
rates of inflation. According to Eijffinger, & Haan, p.12 in the working paper ‘The Political
Economy of Central Bank Independence’ there are three explanations that explain the
phenomenon of central bank independence being associated with low inflation rates these
include; public choice argument, the study of Sargent and Wallace, and the time inconsistence
crisis of monetary policy.
The public choice perspective indicates that authorities dealing with monetary policies
are exposed to pressures from political spheres so as to fulfill government objectives. Due to
monetary constraints makes the government adjust the budget. This is through reduced tax
income due to temporary economic slowdown lowers the seigniorage and public debt burden in
the short run. This makes the government prefer the easiest way to obtain finance which is
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through central bank (Eijffinger, & Haan, p.15). This will not be the case if central bank is
independent.
Sargent, & Wallace indicated that fiscal and monetary authorities must be distinguished,
i.e. money becomes endogenous when the six of the budget cannot be influenced by monetary
authorities. If the public taxes also does not then finance the debt the budget is constrained thus
central bank must create money to clear the deficit if they are government aligned (Eijffinger, &
Haan, p.15). Thus independence means they will not finance such budgets without prior plans of
its effects.
Time inconsistency also account for inflation is time inconsistency, where plans made for
the future become unviable with the start of the period budgeted for. The government and the
public must be able to cover the lost time thus the government applies incentives thus remains at
a deficit (Lacker, & Weinberg, p.205).
Inflation targeting is one of the strategies of monetary policy that involves five aspects,
firstly is the medium term numerical inflation targets announced by the public; secondly is the
monetary policy primary goal set as a commitment to price stability while other goals are
subordinate; third is the use of many variables to decide the setting of the instruments of the
policy through an informative strategy; fourth is transparency guarantees that is cultivated
through continuous communication with the public on the monetary policy; and fifth is the
accountability in attaining the objectives set on inflation for the central bank (Eijffinger, & Haan,
p.15). This ensures long term control of inflation where the nation continues to reap the benefits
as time passes.
Cohen‐Cole, & Cosmaciuc, p.1 in the working paper ‘In Noise We Trust? Optimal
Monetary Policy with Random Targets’ addresses the issue of monetary policy that the central
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bank uses to achieve randomized inflation targets rather than fixed targets that have a faster
potential of convergence. For transition environments randomized are observed to achieve faster
convergence. Cohen‐Cole, & Cosmaciuc, uses two ideologies to explain the monetary policy
where the first is the power of central bank to influence in the short run the real economy.
Secondly is the apposite monetary policy mechanism or framework to apply in the transition
environments.
Inflation targeting systems generally contribute to a decline in rapid inflation in
conditions of hyper inflation. This is contributed by bolder objectives of inflation targets and
more importantly presence of skillful bankers who implement the objectives. This can only be
achieved through independence of the central bank where there is no interference with the
operations and management (Hornstein, p.317). The autonomy will be effective since short term
goals of inflation targeting set by politicians for personal gain will be eliminated thus controlling
inflation and other aspects of the macroeconomics.
The bankers must also be credible enough to the public such that pronouncement of low
inflation policy will be taken into consideration. In the event the bankers are not credible their
pronouncements will be countered by the public that may negatively affect the monetary policy
(Lacker, & Weinberg, p.209). In cases where there are transitional expectations where regimes
are changing guards there are always high expectations from the population that must be
addressed by the bankers without prejudice.
For incoming governments setting inflation rates at randomized figures makes them
credible; this is so because the inflation targets from the previous regime may be lower and thus
setting higher levels of inflation will make then incredible (Hornstein, p.317). Therefore, the
government results to set an inflation rate that is random rather than fixed so that to avoid any
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commitments, the public may take it that the figures that are randomized will be lower than the
previous regimes thus the previous regime gains population confidence. When such regimes are
allowed to control central bank this will result to short term political ambitions that may plunge
the nation to financial crisis.
In Cohen‐Cole, & Cosmaciuc, p.3 “Monetary policy randomization has potential
application in at least three cases. Two of these cover the “high” inflation situation,
hyperinflation and persistent inflation. In situations of hyperinflation, a faster convergence rate is
clearly desirable, especially since most “losses” occur in the short run.”
The objective of central bank is to stabilize domestic inflation and also the output gap
given a flexible inflation target regime this means that they must be able to adjust domestic
interest rates that will not be affected by foreign interest rates. This is the major reason that
central bank needs monetary autonomy (Mukherjee, p.5).
The macroeconomics trireme states that at most two of the three conditions stated below
can be chosen in the inflation of small open economies; these are, “Autonomous monetary policy
in the sense of different domestic and foreign interest rates, a fixed exchange rate and/or Perfect
capital mobility” (Mukherjee, p.5). The autonomy of the monetary policy is where the central
bank is independent to carry out the required operations.
Inflation targeting is applied by central bank to give the public an estimate of the inflation
rates targeted by the bank. These targets are then achieved through changes in interest rates and
other monetary options (Williams, p.4). Interest rates and inflation tend to be inversely
proportional hence in the event that inflation is higher than expected lowering the raising the
interest rates will reverse the inflation. When inflation is lower than targeted lowering the
interest rates is the expected move so that inflation can rise.
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This policy can be employed by central to control aspects of macroeconomics. The
knowledge of inflation targeting makes investors have an idea of what the central bank targets of
the inflation rates are thus they can easily the approximate changes that interest rates will be
subject to thus plan appropriately on their investments (Wang, p.5). The investors are also
confident about their investments in view of the fact that they can plan so that the inflation rates
do not impact negatively on their businesses. This has positive effects in that investor confidence
translates to a stable economy of the nation. For states that practice inflation targeting most of
them are successful given that the markets are predictable and accountable which attract
numerous investors. The Federal Reserve’s policy has been involved together with the Federal
Open Market Committee (FOMC) in the targeting of inflation which is not an exact explicit
figure.
The inflation targeting framework should not be just based on announcing figures the
management of central bank should ensure that the announcement to the public gives the
medium and long term objectives for inflation which may be given as a point or varied range. It
must also be institutionally committed to stabilizing of price as a primary objective supported by
other goals. Giving price stability a priority gives credibility to central bank so as to attain the
inflation targets (Mukherjee, p.8). In this case exchange rates ought not to be targeted.
Central bank should also ensure that there is monetary transparency; this ensures that
there is effective communication about the goals of the policy to the markets and public.
Accountability is also essential to achieve the inflation targets where all rationale and decisions
made should be accounted for. The public must be kept in the know so as to achieve the required
credibility, as Cohen‐Cole, & Cosmaciuc, p.3 quotes ‘The public does not have knowledge of the
government’s methods or desires, but is able to learn from the government’s prior actions. This
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is an abstraction that seems appropriate in a situation of low government credibility. Essentially
it assumes zero credibility – any announcement is equivalent to none at all. The public derives all
new information from the actions themselves’. To achieve inflation targeting the government
should not have or should have minimum burdens of financial deficits in its budget and most
important is that central bank should remain autonomous or have a strong degree of autonomy.
The idea of inflation targeting generally occurs and is formulated under perfect
knowledge however in the actual business environment there is imperfect knowledge. Williams,
p.2 in his article ‘Inflation Targeting under Imperfect Knowledge’ identifies factors that impact
on inflation targeting in circumstances where there is imperfect knowledge.
Policy makers are not sure on the evolution of natural rates; for example natural rates of
interests and unemployment are never predictable hence operation in imperfect knowledge for
most economies (Williams, p.6). This gives a challenge to the small economies that base on
inflation targeting since it may result to errors thus hinder stability. The economic structure is
also uncertain and thus policy makers rely on estimates.
Macroeconomics and inflation targeting
Many central banks target on lowering inflation and its volatility as the primary
objectives while other objectives of output are sidelined, but most of those who use inflation
targets have reduced inflation. Growth of the economy is also pursued as a secondary objective.
The true costs of inflation therefore are detected on the output growth, employment, distribution
of income and poverty (Sierra, & Yeager, p.47). Though many countries target inflation it has
remained low even in those countries that use other monetary policies other than inflation
targeting this does not mean the inflation targeting is not effective but it sets the records straight
that inflation targeting can be affected by other secondary factors beyond central banks.
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The credibility of central bank is also at stake if the targets are not achieved this means
that effective policies must be ensured by the experts to make the sacrifice ratio to count. Factors
that might affect inflation such as exchange rates must be monitored effectively so as not to
negatively affect the inflation targets (Sierra, & Yeager, p.49). Proper coordination between
economic policies and the monetary policy would ensure that all targets of growth are met since
lower inflation rates would set a platform for economic growth and investment.
Inflation which is measured as the consumer price index i.e. the price change for
consumer products normally assumes that there is money supply in the economy. Oil as a major
commodity has increased in price at different times resulting to increase in prices of other
consumer products the basis of inflation to measure growth would be misleading since they are
subject to numerous fluctuations (Sierra, & Yeager, p.53). However a stable financial
environment there is an imperative precondition that fosters economic growth and development.
Conclusion
Inflation targeting mainly aims at price stability and when this is achieved there is
protection of currency from fluctuations which in turn contribute to sustainable growth. Inflation
has implications on the distribution of income and wealth this in view of the fact that the wealthy
have the means to buy non monetary assets thus protect themselves from inflation. When
unexpected inflation occurs those who have saved and those earning fixed incomes are affected
most while borrowers benefit. High inflation drives the prices of consumer able products high
and thus the poor are affected since they cannot be able to afford.
Inflation also affects the systems of tax; this is because most tax systems never account
for inflation. When income rises with inflation it will lead to higher taxation thus reduces
monthly incomes for earners. Unmonitored inflation levels in any country will impact on the
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decision making processes. It will be difficult to make decisions since inflation levels and price
stability is uncertain. This translates to poor development and growth since price systems are
unpredictable and thus less efficient. With a stable inflation rate many investors are confident
and this leads to numerous investments that lead to growth and development.
Many analysts may argue that inflation targeting may have its negative impacts of high
unemployment in the short run but benefits in the long run will supersede those achieved by
other policies. Inflation targeting does not only target stable prices but also contribute to the
growth and development of all the macroeconomics of a region but this is achieved with an
independent central bank.
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