With the employment of the monetary policy, financial accounts with
regard to the Consumer Price Index (CPI) can be either weakened or
strengthened. Prices can be substituted, income will be affected, and
overall, the arrangement of the foreign exchange market will be
modified.
Consequently, monetary authorities of sorts can, then,
begin looking at programs that can aid contraction or expansion. Granted
certain restrictions are set, traders can expect improvements in
exchange rates. However, is the implementation of anticipated and
unanticipated changes really a good thing?
Monetary Policy Defined
Types of monetary policy:
- Fixed exchange rate - meant to identify a currency’s spot price
- Gold standard – meant to lower inflation rates for gold
- Inflation targeting – meant to identify changes in a given rate in the CPI
- Mixed policy – meant to impact CPI and unemployment
- Price level targeting –meant to identify a CPI number
Monetary
policy, be it contractionary or expansionary, is the process that
describes a country’s monetary control over money supply. It targets
inflation rates and interest rates to ensure trust in the currency and
stability of its value. Moreover, it is meant to play a significant role
in combating low unemployment rates, contributing to economic growth,
and predicting exchange rates.
Contractionary & Expansionary: What’s the Difference?
Contractionary
monetary policy is used to slow inflation rates to avoid the
deterioration of asset values and distortions. It raises rates to meet a
target while refusing to force authorities into a recession.
Expansionary monetary policy, on the other hand, is implemented to have a
defense against unemployment. Since it hopes that authorities will be
enticed by presenting them easy credit, the action plan involves
lowering interest rates.
Criticisms Regarding the Monetary Policy
Criticisms
regarding the monetary policy have been voiced out several times. As
per Anna Schwartz, Milton Friedman, and a number of other monetary
economists, with it, a probable downfall of the monetary supply is a
possibility. Also, according to Paul Volker, chairman of the US Federal
Reserve, said that its implementation is rather impractical since the
relationship between monetary aggregates (e.g. savings deposits,
physical cash, and money market shares) and macroeconomic variables
(e.g. Gross Domestic Product, unemployment, and inflation) can be
unstable.
Internationally Speaking
Since
there are interdependent open countries such as England and Scotland,
questions about how the monetary policy will be implemented have
emerged. By taking into account devaluations and strategic interactions,
it can result to international feuds. Thus, whether inflation and
domestic output gaps are affected, it remains to be argued that it will
only complicate different financial markets’ conditions.
References: Technical points have been taken from MTrading.in – an Indian Forxer broker.
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