Monetary Policy
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Monetary Policy
The main purpose of having a monetary policy is to have a means through which a regulatory body is responsible of controlling the supply of currency. The body is in charge of demanding interest rates that are used to develop the nation thus ensuring its growth. The dynamics of monetary policies involves aspects such as supply and the rates at which it is disbursed. Two categories stem from monetary policies based on the velocity of its supply. These include the expansionary and contractionary policies. The role of expansionary policy is the reduction of interest rates as a means to provide solutions for unemployment that is rampant during the recession period.
Summary
According to an article by MT Newswires, the Fed Governor, Jeremy Stein, suggested in a speech on monetary policy, that it should be limited when the risk premiums in the bond market are unusually low. The limitations imposed should consider and accommodate a substantial decrease or fall in the unemployment level as compared to its full employment level. The governor mentions the financial market vulnerability, which according to his opinion is risked when a monetary policy is accommodative (MT Newswires, 2014). However, there is a positive aspect to this policy that is the probable reduction of the expected unemployment.
The aforementioned results of this type of policy raise the variability of the rates in unemployment. The stability in the financial sector is considered only in instances where it affects the risk rates in the employment leg. He agreed, when questioned whether there are cases where one should tolerate an increased fall in the unemployment rates as compared the full employment owing to the fact that it may pose as a hidden advantage in financial market advancement (MT Newswires, 2014).
Analysis
Accommodative monetary policy can be termed as an easy monetary policy as it is an attempt by the Federal Reserve to increase the expenditure of business and consumers by reduction of the selling and borrowing rates of money. This effort is usually directed towards improving the economy.
There should also be close monitoring of the low bond market risks which are vulnerable is experienced fluctuations that hinder the governments effort in curbing unemployment (Beckner, 2014). In support of the fed governor, there should be a limit on how accommodative a policy should be. Incases where the bond rates are low, it should translate to higher interest rates, as their relationship is inversely proportional.
This should be a condition set in applying accommodative monetary policy. This policy as a suggested means of regulating money supply is considerably advantageous. The governor’s reasoning is valid when he mentions that in cases where the outcomes are considered advancement in the financial market, accommodative policy should be implemented. This is because the resultant lowered interest rates secure investment from local and foreign companies as observed in the graph above. The high rates of investment propel the financial market to greater a level leading to economic growth (Beckner, 2014). Investment opens up venues that assure employment and thus act as a means of curbing the increasing issue of unemployment.
There are several aspects to be derived from this analysis. Firstly, the lowering of interest result to an increase in the bonds thus makes them less lucrative. The devastating effects resulting from this increase is that the investors will opt for selling the bonds and purchasing less expensive one, thus the currency loses its marketability in the monetary market. There is a direct linkage between employment and monetary policies. As observed, monetary policy influences the rates of inflation and the demand of services and good that are manufactured by workers who constitute the employed percentage (Board of governors’, 2013). The changes in the interest rates where they are lowered make it affordable for people to purchase more products that are manufactured. The manufacturing companies respond to this increase in demand by employing more workers thus increasing the rates of employment (Board of governors’, 2013).
In conclusion, monetary policies affect the fundamentally crucial aspects of the economy thus when considering the type of monetary policy to implement the aspects should be considered. The economy is the frameworks of a governmental structure and influences it greatly.
References
Beckner, K.S. (2014). Fed’s Stein: Low Risk Premia May Mean Monetary Policy Too Lax. April 16, 2014. mni Deutche Borse Group.
Board of governors’ of the Federal Reserve System. (2013). How does monetary policy influence inflation and employment. Washington, DC: US. Government Printing Office.
MT Newswires. (2014) U.S. ECONOMICS: Fed Governor Stein Comments on Monetary Policy and Financial Risk. NASDAQ. Retrieved from