Question No. 2:
Monetary Policy—-Will Global Economy Be Revived or Declined?
Introduction:
This year, the global economic system is facing an unprecedented challenge. Due to the raging of the coronavirus epidemic, many stockholders respond that they are now facing ” economic recession “. For example, their country will have a mass of unemployment population hence the country would not earn any income, these large-scale companies and films would be made ends meet so that they would not any longer maintain their operation, the consumption market of these metropolis has been dramatically diminished as there is no citizens and tourists purchase and visit here,…etc. These phenomenons demonstrate that this “century epidemic” not only affect the global economy but also frustrate the confidence of large enterprises in restoring the economic environment. In order to recover the huge economic losses caused by the epidemic and restore the stability of the economic market, monetary policy plays a crucial role in succeeding the goal. However, many economists have different positions and opinions on the effectiveness of the monetary policy, both pros and cons.
It is high time to explain the advantages and disadvantages of monetary policy in the following paragraphs.
One of the advantages of implementing monetary policy is that it can encourage the highest degree of sustainable economic production and encourage a competitive market system. Remaining stable prices ensure that inflation is kept low, and San Francisco’s Federal Reserve Bank admits that low inflation is all that monetary, hurting growth. In contrast, households and policy can achieve stable prices in the long run. Inflation limits money companies’ buying power to make financial decisions without thinking about sudden unforeseen price spikes. According to the article written by Ross(2020), he noted that most modern central banks target a country’s inflation rate as their primary monetary policy indicator are usually at 2-3 per cent annual inflation rate. By raising interest rates or other hawkish policies, central banks tighten monetary policy if prices rise faster than that. Higher interest rates make borrowing more expensive, curtailing both consumption and investment, all of which are highly dependent on credit. Similarly, the central bank will lower interest rates and make borrowing cheaper, along with many other potential expansionary policy instruments, if inflation falls and economic production declines. As a result, if the inflation rate is lower, the money supply will higher, it leads many customers to buy goods and services to revive the economic system.
Another advantage of monetary policy is that it has the right to political independence. If central banks operate free of political constraints, they are free to make policy decisions based on economic conditions and the best economic performance data available, rather than short-term political factors imposed by elected officials or political parties. The U.S. Federal Reserve, though accountable to Congress, works with a high degree of political freedom. The board members of the Federal Reserve are presidential candidates but have staggered terms to make it easier for a president to stack the board with favoured candidates. When central banks lose independence, monetary policy is placed under political pressure. According to the website written by Fed(2019), they stated that as an autonomous organization that makes decisions based on the best available facts and research, they can better accomplish the goal of promoting maximum jobs and stable prices without taking politics into account. Moreover, countries with autonomous central banks capable of making decisions that are free of political interference have better economic results for their people. As a result, monetary policy will be released effectively without any political pressure.
Even though the monetary policy has some profits of the monetary system and the global economy. However, monetary policy still exists some drawbacks depends on the time and goals.
To be honest, one of the disadvantages of the monetary policy is that it can’t stimulate the economy in a short time with the government’s expenditure on new public projects and the implementation of new policies. Monetary policy actions take time to figure their way through the economy, especially an outsized, modern economy like that of the U.S. and other world economic powers. According to the article written by Federal Reserve Bank of San Francisco(2004), it explained that a monetary-policy intervention will take a relatively long time to impact the economy and inflation, and the lags, too, will differ considerably. The major impacts on production, for example, can take from three months to two years anywhere. And the inflationary impacts appear to entail much longer lags, maybe one to three years or more. Therefore, monetary policy will not immediately affect the changed economic growth and severe inflation.
Apart from time, another disadvantage of monetary policy is that the target of them will be sometime conflicted. The Federal Reserve and other central banks will use monetary policy to achieve low long-term inflation, with short-term effects on economic production and jobs. San Francisco’s Federal Reserve Bank notes that often those priorities clash. Reducing interest rates to expand the money supply and curb rising unemployment levels during a recession, for instance, may cause future inflation if monetary policy remains too long expansive. The strongest monetary policy aims at striking a balance between certain short-term and long-term goals.