Independent Monetary Policy: Impossible Trinity Essay

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

The financial crisis of 2008 has been described as the worst financial crisis the world has seen since the great depression, but there are now murmurings of the potential for an even greater financial crisis, a currency crisis, caused by the demise of the US Dollar. The Dollar has been the reserve currency of the world since it took over from the Pound at the end of world war two, but we examine if it is about to crash spectacularly?

Mr. Emanuel, in the current economic climate, the Obama administration’s course of action has been to pursue aggressive countercyclical fiscal policies designed to prevent further economic deterioration. Critics of these policies argue that:

The internet has allowed the money market to operate 24 hours a day. It has been noted however that exchange rate volatility has increased,[v] which makes it more difficult for the government to set monetary policy.

Legislative institutions depended with the mission of oversight of the financial framework are ill-suited to address macroeconomic concerns. For instance, Federal Reserve is a reason for more prominent flimsiness and instability than more noteworthy request and certainty. Cutting or bringing interest rates up in with a perspective to pumping a lot of liquidity into the budgetary framework or, in actuality, limiting cash supply keeps market components from setting the right cost of cash and assigning capital proficiently. However, it is not in any case responsible to people in general, as it is chosen in a roundabout way and responsible to open everywhere through a long chain of appointment. Money related markets can

This paper will discuss the implications of the Fed’s monetary policy on the globe because of the gold standard, the problems caused by a decentralized Fed, and the Fed’s failure of a lender of last

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

The United States of America has enjoyed the strongest economy on the face of earth for quite a long time (Index Mundi, 2012). It has also enjoyed the portion of eminence on political platform. Having owned the valuable resources, the economy has gained high importance for both developing and developed nations. The currency of USD is assumed to be the common medium of transaction at international level and it is also a benchmark to calculate the value of other currencies.

With no need to defend an exchange rate and no need to thwart an externally sourced currency crisis and no need to defend against speculators, there would be no need for the Central Bank of those three countries to

However this is not always the case. To deal with these worries, Milton Friedman argued that there should be necessary reforms to make sure that central banks are autonomous and are able to maintain the financial liquidity of the system. However, classical highly doubt the autonomy of central banks from political interference. The central bankers are subjected to appointment by politicians and therefore may make decisions that deviate from the autonomy principle of the central banking institutions. Therefore their decisions may only serve the interests of the government and politicians and not the interest of the larger

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

Secondly, the fixed dollar-pegged exchange rate system and monetary policy, the independence of the existence of a fundamental conflict, undermine the effectiveness of monetary policy cannot meet the needs of economic development. Monetary policy autonomy is essential for China’s macroeconomic stability; monetary policy should take precedence over the independence of significant exchange rate stability. But the Yuan against the U.S. dollar exchange

1. The gold standard and the money supply. Under the gold standard all national governments promised to follow the “rules of the game”. This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply? A country’s money supply was limited to the amount of gold held by its central bank or treasury. For example, if a country had 1,000,000 ounces of gold and its fixed rate of exchange was 100 local currency units per ounce of gold, that country could have 100,000,000 local currency units outstanding. Any change in its holdings of

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.

The crisis calls for reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply. The main objective of the reform is to ensure global economic and financial stability.