Full, and in-depth summaries for monetary policy, Economics 244, up to, and including, the "monetary control process". I received an overall distinction by making and using these notes. All articles have been summarized into these notes.
In a market economy (interaction between demand and supply is the primary instrument
for solving the economic problem of scarcity), the market is not always successful in solving
the scarcity problem efficiently.
Market failures occur and this is why the government partakes in the economy (with
policy) attempting to achieve certain macroeconomic objectives.
These objectives can be divided into two broad groups:
1.1 STABILITY OBJECTIVES
Internal price level stability (stability in the valu
inflation rate
Balance of payments equilibrium, and exchange rate stability, which imply the avoidance of
chronic deficits in the balance of payments and the prevention of excess fluctuations in the
exchange rate of national currency.
Stability of income and employment within the context of the business cycle
of over and under employment of factors of production as a result of the cyclical upswings
and downswings in economic activity.
1.2 STRUCTURAL OBJECTIVES
Expansion of the economies productive and employment capacity
- In contrast with stabilisation objectives aimed at removing the cyclical instability
in economic activity and employment
- This refers to the long term trend rather than the sort term fluctuations around
that trend.
Equitable distribution of income and wealth in the economy
- This objectives involves an attempt to eliminate an excessively skew distribution
of income and wealth- a situation in which a small percentage of the total
population earns a large proportion of aggregate income or owns a large
proportion of wealth.
To achieve these objectives, government makes use of a variety of policy instruments,
monetary policy being one such instrument.
, 2) MONETARY POLICY
2.1 Definition and objectives:
all deliberately taken actions by the monetary authority/ central bank to influence
financial variables (such as monetary aggregates, interest rates and exchange rates) in order
to achieve the macroeconomic stability objectives (aimed at stabilisation objectives – focus
on one objective)
- It is not the task of monetary policy (primary task) to expand the potential
productive capacity of the economy.
- Distinction between the short and long run Philips curve – in the SR there is a
trade-off between inflation and unemployment (curve is negatively sloping),
whereas in the LR there is no trade off (the curve is vertical)
HOWEVER, this does not mean that monetary policy is irrelevant when it comes to long-
term growth economic stability creates a favourable climate for long-term growth.
For example:
A high inflation rate adversely affects the opportunity for healthy long-term growth
(Monetary authorities always have to justify their focus on the curtailment of inflation)
Goal: (not part of the primary objective of monetary policy), is an equitable distribution of
income and wealth
- Monetary policy cannot be used as a main instrument to achieve this goal (more
fiscal policy)
- It can contribute in an indirect manner to achieve this objective (eg by reducing
poor than the rich)
- Poor less able to protect themselves against inflation by adjusting their portfolios
of assets, and poor reported inflation to be a greater concern to them than the
rich.
if monetary policy aims to achieve the stability objectives…
- Should all three objectives be aimed for the simultaneously by the monetary
authorities.
- Academic answer – No, one instrument for one objective
Eg if a fixed exchange rate is the objective, then this is where the focus of monetary policy
should lie. Monetary policy should not be used to try simultaneously stabilise economic
activity (business cycle)
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