Monetary Policy

Introduction: Monetary policy involves the regulation of the money supply and of interest rates by a central bank. In the United States, monetary policy is determined by the Federal Reserve Board. The goals of the Federal Reserve Board (the Fed) are to encourage economic growth, control inflation, reduce unemployment to acceptable levels and stabilize the exchange rate between the U.S. dollar and foreign currencies in the foreign exchange marketplace. Monetary policy is one of the two ways the government can impact the economy. By regulating the amount of money in circulation the Federal Reserve can affect the amount of money that is spent by consumers and businesses.

Opinion: In an ideal world, monetary policy would be made by rule rather than by discretion. The key to using decision rules involves the identification of key relationships that, taken together, provide a useful approximation of the dynamics of the economy. Such an approximation would be the basis for statistical models that the Federal Reserve uses to assess the likely outcome of monetary policy decisions and determine the appropriate interventions by the Fed.

There are certain rules the Fed should accept according to Kenneth Kuttner writing in Review (Federal Reserve Bank of Saint Louis). One such rule involves inflation targeting. A non-contingent or unconditional rule represents an inflexible commitment to a stated rule such as this:

. . .
de policy-makers with useful information for the conduct of monetary policy but it is clear that more research is needed to determine how much weight policy-makers should assign to the information yielded by simple rules. They add that banks must contend with several sources of uncertainty when setting monetary policy. One means of accounting for uncertainty and of mitigating its impact, is to incorporate projections from a variety of different models into the decision-making process. The simpler the model and the simpler the rules, the faster models can be created, examined, modified and evaluated by policymakers. In other words, simple rules are used to create models that are not as sophisticated as they might be, but nevertheless yield valuable insights for policymakers (Cote, Lam, St-Amant 27). An article by Michael Tagera in Social Science Journal contains an argument against monetary policy rules. He writes that definitive rules should be rejected because they run monetary policy on autopilot and end policymaking. Rules put the country's monetary stance into predetermined paths irrespective of circumstances. Tagera worries that when new problems arise that cannot be anticipated by predetermined rules, and changes in ci
. . .

Some common words found in the essay are:
Reserve Board, Science Journal, Canada Review, Federal Reserve, Saint Louis, San Francisco, Fed American, Board Fed, monetary policy, Gregory Mankiw, Introduction Monetary, federal reserve, policy rules, monetary policy rules, simple rules, federal reserve board, reserve board, review federal, monetary policy rule, reserve bank, review federal reserve, federal reserve bank, policy rule, economic growth, rule discretion,
Approximate Word count = 1214
Approximate Pages = 5 (250 words per page)

More Essays on Monetary Policy