1.Introduction
The European Central Bank (ECB) is a part of the attempt at European Monetary Union (EMU) and is the single locus of the European System Central Banks (ESCB), which has been formed from the voluntary union of national central banks, and the ECB itself. The National banks, like the Bundesbank, have however not been abolished. They merely become operating arms of the ECB. The ECB assumes responsibility for EU monetary policies, but it is the Council of Ministers and the not the ECB which is empowered to conclude agreements on the exchange rate systems in relation to non-EU currencies and to change the central rates for the single currency within the system. Therefore, for the exchange rate, it rests with the Council of
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Furthermore, to point out, long-term interest rates, which reflect inflationary expectations, did indeed fall in the UK after the Bank of England was given operational independence.
I have also observed that countries with independent central banks have lower inflation. This claim raises what economist call "a problem of causality". Cause and effect can be difficult to disentangle. Is it that countries with independent central banks have low inflation? Or is it that countries with low inflation have independent central banks? Or is it that there is something about these countries which creates both the independent central bank and the low inflation?
One might argue, that in the case of Germany, we have a country, which, twice in about 20 years, faced social collapse through hyper-inflation and therefore developed a very high anti-inflationary attitude. Through out society one manifestation of this anti-inflationary attitude might be low inflation. Another manifestation might be the Bundesbank.
I shall now present argument against independent central banks.
3.Arguments against Independent Central Banks
3.1Co-ordination of economic policy
This is a very old and probably also one of the most famous arguments, that monetary and fiscal policy would work best if they were working together. If fiscal and monetary policy are not co-ordinated, if they are not working together as part of some overall strategy, then economic policy as a whole will not be as
Since the Central Bank has the exclusive right to issue money in the economy, it can have extensive influence on the determination of interest rate in financial markets and in the economy as a whole, by adjusting the interest rate on short-term loans to financial institutions. Central Bank interest rates on these loans therefore have the most immediate impact on other short-term interest rates in the money market. By influencing interest rates, monetary policy then has an effect on the savings and expenditure decisions of individuals and corporate.
Fiscal and monetary policy are alike because they are both meant for economic goals but differ in that fact that the government controls fiscal policy and the Federal Reserve controls monetary policy.
In an instant a single organization, with minimal government oversight, can influence entire markets and monetary supply of the country with the largest economy in the world. The United States founding fathers established a government system to distribute certain powers of the federal government to particular branches that have checks and balances in place to assure efficiency and openness among its divisions. One may assume that the organization that controls the monetary supply of an economic powerhouse of a country would have strong oversight and control over the policies they carry out. The Federal Reserve, also referred to as The Fed, has a purpose to protect and control the fiscal system of the United States to create a safer lending and borrowing market for private citizens, businesses, and the federal government. Americans perceive the Fed as an extremely powerful organization. Some have asserted, including Hillary Clinton’s spokesman, Jesse Ferguson, that “The Federal Reserve is a vital institution for our economy and the well-being of our middle class” (qtd. in Shapiro 7). Unfortunately, Federal Reserve financial policies have become detrimental to the growth of the national economy and the dollar, therefore, congressional actions against the Federal Reserve Bank are a necessity to avoid continuation of instability in both US and world markets.
Monetary policy is the regulation of the money supply to influence variables such as inflation, employment, and economic growth. Fiscal policies, on the other hand, use the ability to tax and spend in order to influence those same variables (McEachern, 2014, p. 57). A blend of both of these policies is essential for improving the economy when a recession has occurred.
Inflation is an increase in the average overall price for goods or services while deflation is the decrease of average overall price for goods and services. Inflation always produces the effect of reducing the value of money and reduces the value of future monetary obligations. Reducing the value of money means a consumer has less money to buy services or goods. Reducing the value of future monetary obligations means investing or lending becomes more restricted as the value of return will be less than the amount paid back. Economist Arthur Okun analyzed the relationship between Unemployment and the GDP statistical. Okun’s law simply states that with rising unemployment there is a relationship of slow growth. Unemployment is a person looking for work and unable to find work. Deflation is the value of any amount of money rises. Deflation makes borrowers less likely to borrow because the value of the money they have to pay back will raise.
No one wants their freedoms muted, stolen, seized, or threatened. Our nation struggled for eight years in the American Revolution, to break the choke hold of Britain on Americans. After the war was over and America was independent, there had to be a plan. Where were all these free people going to go? Were they going to settle across the land and live like the indians that inhabited the places around them? That might have not been a bad idea, but just as the indians were kicked out of their home by Americans, any other foreign power would have eventually done the same to Americans. Helen Keller makes a good point when she says: “The most pathetic person in the world is the one who has sight but no vision.”
Today in the money and banking world, the two largest central banks are the Federal Reserve (Fed) and the European Central Bank (ECB). There are many things that make these two entities similar and many things that make them different. Both are effective in their own ways, but which one is more effective. Is one superior than the other? Which central banking entity is more accountable? Looking at the structure of these entities will only help us answer the questions. When it comes down to it, which central banking system would you prefer?
Stimulating, keeping balance, and influencing our economy are only a few things our nation strives for when it comes to regulating our economy. Two of the powerful tools our government uses in getting our countries economy in the right direction are fiscal and monetary policy. Both of these policies are extremely effective in their own ways and when used together can only help an economy more than harm it. Taking a closer look at the policies individually, the fiscal policy seems to have a bigger role in regulating the economy. Through government management the fiscal policy seems to hold up its part of the deal and betters the economy in the long run.
In the 1970s the Great Inflation was the defining macroeconomic event during that time. The failure changed the theory of macroeconomics, and the rules that guide the monetary policies of the Federal Reserve. The president at the time had major spending programs which complicated with monetary policy. Some people claim that the cause of the inflation was due to the lack of proper incentives. Also people claim that it may have been some mistakes made by the central banks.
The relationship between inflation and unemployment is a topic, which has been debated by economists for decades. It is this debate that has made the opinions about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing.
Monetarist view relates to the work of Milton Friedman. The monetarist theory of inflation asserts that the general price level would rise only due an increase in money supply, but will not be proportionate. According to monetarists, money supply is the dominant but not exclusive determinant of both prices and the output level in the short run, but in the long run money supply only determines the level of prices. The output level in the long run is not determined by money supply. Monetarists emphasize so much on the role of money and therefore hold that money supply is very crucial tool of monetary policies in stabilization of the economy as compared to fiscal policies. Milton Friedman stated as follows “inflation is always and everywhere monetary phenomenon” that will arise when money supply rises at a faster rate than the growth of national output.
Having spent the weekend sifting through the minutes to 18-19 March Federal Open Market Committee (FOMC) meeting, I came away with the impression that there is a chasm between policy conduct and forward guidance. The underlying rhetorical tone of the minutes was dovish: short-term interest rates will remain at low levels for a protracted period. Despite this, the impression remains that the Fed, under Chair Yellen, is more hawkish in its policy stance than anybody expected. There were repeated references in the minutes that the Fed has badly missed the mark with respect to its dual mandate, particularly achieving the 2% inflation target. Given this failure, it seems odd that the Fed is pursuing tapering and making preparations for increasing interest rates, albeit some way off down the road. This paradox can be explained past policy behaviour.
The Central Banks of the world have a role in today’s society to provide stability to the economy. Through monetary policy, the Central Banks must utilize the daily economic data in order to make policy decisions that attempt to ensure continuous growth and prosperity. The Central Banks do this through regulating inflation as well as “implementing specific goals such as currency stability, low inflation and full employment” (Heakal). In 2008 the global financial crisis hit numerous nations around the world and each Central Bank saw their economies crash, consumers lose market confidence, investors stop investing, and banks stop lending. If the money stops circulating in the economy “banks [can’t] provide customers with a variety of basic financial services; [such as] an on-demand source of bank notes; deposits and savings accounts; payment services; and … credit, to both business and households” (Fisher 2). The credit crunch was experienced throughout the world and each Central Bank laid out their plans in order to halt and begin recovering from the crisis and set the economy back to a stable 2% inflation. Along with The Federal Reserve, the Bank of England’s conventional attempts at restoring the economy never had enough of an impact to jump start the economy. An unconventional crisis called for unconventional resolutions. The Bank of England turned to unconventional monetary policies when all else failed. The utilization of the practice of quantitative easing and
European monetary union is based on the assumptions of presence of fixed exchange rate, free movement of capital and coordinate monetary policy. Fixed exchange rates are preferred by producers and consumers of the European economy, since the economy becomes more predictable. In such market conditions, it is easier to foresee the future and plan the actions that are to be taken up in the future. The second assumption - free movement of capital - is crucial for optimizing the use of capital and for enlarging the benefits that come from it. The third assumption is coordinate monetary policy; its role is vital in creating monetary union, since it ensures that the countries participating in the union have the same aims and together strive to
An understanding of those mechanisms through which monetary policy affects economy is very crucial for the successful undertaking of monetary policy. There exist a number of crucial channels that have been identified in this context. These channels are;