A Better Monetary Policy Central

1612 Words Aug 25th, 2014 7 Pages
A Better Monetary Policy Central Banks Should Adopt in the Environment of Low Inflation

CONTENTS
1 Introduction 2
2 Problems 2 2.1 Low Inflation Retards Economic Recovery 2 2.1 It Remains Questionable Which Monetary Policy is Better 3
3 Comparison Between Interest Rate Policy and Money Supply Policy 3
3.1 The Advantages and Drawbacks of Lowering Interest Rate 3
3.2 The Advantages and Drawbacks of Increasing Money Supply 4
4 Conclusion 5
5 List of References 6

Keywords: Monetary Policy; Interest Rate; Money Supply; Central Bank Introduction
After financial crisis in 2008, inflation of most of the western countries went down dramatically, especially in the Eurozone. Inflation has been below the European Central Bank’s target for a couple of years and is anticipated to remain at a low level in the near future. Such a low level of inflation goes out of most central banks’ goal, contributing to a risk that this situation will lead to a slide into deflation. (Bernoth, Fratzscher and König, 2014). To prevent deflation caused by a financial crisis or to revive economic growth, according to Herbst, Wu and Ho (2014), central banks can use interest rate policy to promote lending by lowering interest rate to encourage economic activity. Central banks can also use money supply policy that central banks pump money directly into the financial market to increase circulating money supply. Today this is known as quantitative easing (QE).

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