StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Creating Your Own Monetary Policy - Research Paper Example

Cite this document
Summary
This research paper "Creating Your Own Monetary Policy" is about effectively defining the concept of monetary policy. From the discussion of this paper, we can denote that monetary policy is a series of actions that a government initiates for purpose of influencing the availability of credit…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.8% of users find it useful
Creating Your Own Monetary Policy
Read Text Preview

Extract of sample "Creating Your Own Monetary Policy"

Monetary Policy: Monetary policy refers to a series of actions that the United s Federal reserve undertakes for purposes of influencing the availability of credit and cost of money, for purposes of promoting national economic growth. The 1913 Federal Reserve Act allows the Federal Reserve to create a monetary policy. There are three important tools of monetary policy, and they are, the reserve requirements, the discount rate, and the open market operations (Orphanides and Volker, 17). The discount rate refers to the amount of interest that the Federal Reserve charges to commercial banks and other financial depository institutions for the various loans that they acquire from the discount window of the Federal Reserve. The reserve requirements can also be referred to as the reserve cash ratio. This is a requirement that banking institutions need to deposit a certain amount of money to the Federal Reserve against the various deposits that is made by their respective customers. Open markets operations on the other hand involve the processes of the country’s central bank to sale and buy government bonds in an open market (Orphanides and Volker, 27). The main aim of using this tool as a monetary policy is to manipulate the supply base of money within an economy, and the short term interest rates, for purposes of controlling the nature and level of money supply within an economy. This paper develops a monetary policy that differs from the last policy statement issue by the FOMC. The last policy statement by FOMC was released on 30th of October 2013. Under this policy statement, FOMC denotes that it will continue with its asset purchasing programs. This is because the committee had noted that the policy gained efficiency in improving the economic activities of the United States of America. The committee also has plans to adjust the pace of its asset purchases, but it is still waiting for a report on the levels of progress that the current pace in asset purchasing has an influence in the American economy (Press Releas, 2). According to this policy statement, FOMC made a decision to continue with the purchase of additional mortgages that are backed with securities. This is at a price of $ 40 billion every month. The FOMC also decided to buy long term financial securities at an amount of $ 45 billion every month. Under this policy statement, the FOMC decided to maintain its policies of re-investing principal payments (Press Release, nd. 3). These principal payments emanate from its various holdings of the agency debts and mortgage backed securities. The FOMC also decided to sale matured treasury securities through an auction method. By implementing these policies, the FOMC believes that they would manage to maintain and achieve a down ward pressure on long-term interest rates. The FOMC also believes that they will manage to support the mortgage market, helping to create a broad financial condition that is more accommodative to the various economic and financial interests within an economy. On this note therefore, the FOMC decided to continue with its purchases of mortgage backed securities. This will in turn lead to the growth and development of the economy under consideration. For effective implementation of these policies, the FOMC decided to closely monitor all information concerning the financial and economic development of the country. The monetary policies identified by FOMC do not solve the problem of liquidity. Liquidity is a Macro economics issue that refers to the extent in which a security or an asset can be sold or bought without having an effect on the price of the particular asset. One major characteristic of liquidity is the high number of trading that the asset under consideration attracts. Examples of assets which are highly liquid include securities of money market. During the 2007 credit crunch, it was very difficult for people to access funds such as loans (Orphanides and Volker, 33). Due to the difficulties of accessing credit, then chances are high that the economy might fail to grow. On this basis, there is always a need of increasing the liquidity of a state. Through this increase, chances are high that economic agents might be able to access credit, and hence lead to the development and growth of the economy under consideration. The identified monetary policies of FOMC do not address this problem of liquidity (Ray, 28). In my own opinion, for purposes of increasing liquidity, curbing inflation and improving the economy of the United States, the FOMC should adapt the use of term auction facility. This policy was successfully used by the Federal government in 2007 as a response to the sub-prime crises that hit the United States of America (Ray, 28). This is after the failure of the Federal government policy to increase liquidity through a reduction of its discount rate. Under this policy, the Federal Reserve will embark on a bid to auction a given amount of short term loans which are collaterally backed (Orphanides and Volker, 22). These loans are auctioned to depository institutions which are financially stable, and evidence of their financial capability is given by their reserve banks. Under this instrument of monetary policy, depository institutions will make a bid for these short term loans through their reserve banks. In choosing a minimum bid, an index swap that relates to the maturity of the loan is carried out during the night (Ray, 28). Through this auction method, a financial institution gains the capability of borrowing money at a cheaper rate that is way below the discount rate. On this basis, the Federal government will succeed in increasing liquidity within the economy, therefore preventing an occurrence of liquidity crises (Orphanides and Volker, 31). Liquidity crisis refers to a notion whereby the cash resources of an economy are in a very limited supply, and the demand on the other hand is high. Other sources of liquidity for an economy include earnings from exports, direct foreign investments, and remittances from their citizens working abroad. Solving this liquidity crisis through the use of term auction facility will lead to an increase of higher interest rates charged on credit, and thus there will be an ease in obtaining loans from banking institutions. This concept can easily be represented by the use of a yield curve (Ray, 28). A yield curve is referred to as a graphic representation of the short and long term interests of bonds and financial securities issued by the government. In order to fix the short term interest rates, monetary policies are the best tools of solving the problem. The rates of the long term interest on the other hand are determined by the market under consideration (Ray, 48). A yield curve has three major shapes, and each shape identifies a particular situation. An upward sloping yield curve indicates that the interest rate of a long term loan/ bond is above the interest rates of a short term loan/ bond. On this basis, there is an expectation of a rise in the short term interest rates of a government bond or a loan. Ray (33) denotes that an inverted yield curve is a symbol that the economy is not performing well, and hence, there is a drop of the interest rates. Ray (34) further believes that a flat a flat yield curve is a symbol of an increase in the interest rates of the long term and short term loans. The following is a data on the interest rates, and the subsequent yield curve for the year of 2013 (Resource Center n.d, 03); Date One month Three months Six Months one year Two years Three years Five years Seven years Ten years Twenty years Thirty years Dec 2nd 2013 0.02 0.05 0.10 0.13 0.30 0.59 1.43 2.19 2.81 3.58 3.86 Dec 3rd 2013 0.04 0.06 0.10 0.13 0.28 0.58 1.40 2.93 2.79 3.56 3.84 Dec 4th 2013 0.04 0.06 0.10 0.13 0.30 0.60 1.45 2.19 2.84 3.63 3.90 Dec 5th 2013 0.02 0.06 0.10 0.13 0.30 0.61 1.49 2.23 2.88 3.65 3.92 Dec 6th 2013 0.03 0.06 0.10 0.13 0.30 0.64 1.51 2.23 2.88 3.63 3.90 Dec 9th 2013 0.04 0.07 0.10 0.13 0.30 0.64 1.51 2.23 2.86 3.61 3.88 Dec 10th 2013 0.03 0.07 0.10 0.14 0.30 0.62 1.46 2.17 2.81 3.56 3.83 By looking at this curve, we can denote that it is an upward sloping yield curve. An upward sloping yield curve indicates that the economy is recovering from recession, and there is availability of credit. On this note, this yield curve denotes that the American economy is expecting a rise in the interest rates of its securities, bonds and loans. The term auction policy will therefore help in accelerating the rise of interest rates, through promotion of liquidity. It is important to denote that the main aim of the term auction policy is to increase monetary liquidity into the economy (Ray, 36). This is by auctioning the short term loans at a lower interest, for the main purposes of encouraging the flow of money within an economy. In the long run, this policy might lead to an increase in the interest rates of a country’s economy. In conclusion, this paper manages to effectively define the concept of monetary policy. From the discussion of this paper, we can denote that monetary policy is a series of actions that a government initiates for purposes of influencing the availability of credit. The FOMC is the body that has the responsibility of initiating a monetary policy, and it normally issues press briefings on the policies that it seeks to pursue. This paper proposes a monetary policy that can help the government to increase liquidity in its economy. The policy under consideration is the term auction policy. Works Cited: Orphanides, Athanasios, and Volker Wieland. Complexity and Monetary Policy. London: Centre for Economic Policy Research, 2012. Print. "Press Release." FRB: --Federal Reserve issues FOMC statement--October 30, 2013. N.p., n.d. Web. 10 Dec. 2013. . Ray, Partha. Monetary policy. 1. ed. New Delhi: Oxford University Press, 2013. Print. "Resource Center." Daily Treasury Yield Curve Rates. N.p., n.d. Web. 8 Dec. 2013. . Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Creating your own monetary policy Research Paper”, n.d.)
Creating your own monetary policy Research Paper. Retrieved from https://studentshare.org/e-commerce/1497497-creating-your-own-monetary-policy
(Creating Your Own Monetary Policy Research Paper)
Creating Your Own Monetary Policy Research Paper. https://studentshare.org/e-commerce/1497497-creating-your-own-monetary-policy.
“Creating Your Own Monetary Policy Research Paper”, n.d. https://studentshare.org/e-commerce/1497497-creating-your-own-monetary-policy.
  • Cited: 0 times

CHECK THESE SAMPLES OF Creating Your Own Monetary Policy

Creating a Plan for Positive Influence

creating A PLAN FOR POSITIVE INFLUENCE Course Date creating A PLAN FOR POSITIVE INFLUENCE Completing a project involving many people successfully is an uphill task.... ?Without a good plan, providing high quality becomes almost impossible.... ?Worst still, lack of proper plans may make meeting set deadline a tight squeeze....
3 Pages (750 words) Essay

Influence of Exchange Rate Regime on Effectiveness of Monetary Policy

Influence of Exchange Rate Regime on Effectiveness of monetary policy The exchange rate regime used by a country greatly influences the effectiveness of the monetary policies of that nation.... In this paper, I rely mainly on the IS-LM BP model to explain the influence of exchange regime in use on the effectiveness of its monetary policy.... ?? Therefore, by using this model to explain the effectiveness of a monetary policy, we would be making an assumption that capital mobility and financial markets are perfect....
6 Pages (1500 words) Essay

US monetary policy

?Many people believe that QE operates to achieve its objectives in ways that are different from standard monetary policy, e.... Quantitative Easing” (QE) is a kind of operations within markets that assist the Federal Reserve achieve its policy targets (Degen 1987).... QE involves open market operations that are not different from the way the Federal Reserve often operates in its quest to attain certain policy objectives....
3 Pages (750 words) Term Paper

Social Equity Venture Fund

Each of these countries' governments should make their own best choice.... your Excellency, many people like to call you 'The Entrepreneur President', and I would say rightfully since you seem to have fully understood Albert Einstein's words 'An empty stomach is not a good political advisor'.... This will result in attaining self- sufficiency for honey, even excessive amounts of honey meant for sale on international markets, and of course creating new job positions....
7 Pages (1750 words) Essay

Monetary policy

Traditional tools of monetary policy include changing the reserve ratio, utilizing of term auction facilities, altering discount ratios, and open-market operations.... The Fed's ability to pay interest on bank reserves helps in putting upward pressure on market interest monetary policy QN1.... It causes deflation and bankruptcyQN 3Traditional tools of monetary policy include changing the reserve ratio, utilizing of term auction facilities, altering discount ratios, and open-market operations....
2 Pages (500 words) Assignment

The Monetary and Fiscal Policy in the UK

The paper "The Monetary and Fiscal Policy in the UK" highlights that the objective of the Bank of England Bank's monetary policy is to maintain the value of the currency and to provide a framework for non-inflationary economic growth by controlling the interest rate.... Each influences the other in a complex interaction which drives the monetary policy decisions.... The monetary policy, dictated by the government's inflation target (2-2.... percent) is announced each year by the Chancellor of the Exchequer as a part of the Annual Budget Statement (monetary policy Framework, 2005)....
13 Pages (3250 words) Case Study

Influence of Exchange Rate Regime on Effectiveness of Monetary Policy

In this paper, I rely mainly on the IS-LM BP model to explain the influence of exchange regime in use on the effectiveness of its monetary policy.... The paper "Influence of Exchange Rate Regime on Effectiveness of monetary policy" is a wonderful example of a report on macro and microeconomics.... The paper "Influence of Exchange Rate Regime on Effectiveness of monetary policy" is a wonderful example of a report on macro and microeconomics.... In this paper, I rely mainly on the IS-LM BP model to explain the influence of the exchange regime in use on the effectiveness of its monetary policy....
6 Pages (1500 words)

Financial Funding for Glen Company Inc

ource of funding;Financial Investment: Financial Investment (may also be referred to as equity finance) entails offsetting part of your shares in the business to another investor.... This company has its headquarters in Toronto Canada having branch networks in Middle East and the rest of African Countries such as Kenya, Senegal and Gambia....
9 Pages (2250 words) Thesis Proposal
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us