Transparency and Monetary Policy
Central Banks have long been connected with confidentiality. The Federal Reserve System is the USA’s central banking structure. Its primary mandate is to balance the rate of increase in goods and services over time while evading a recession that is achieved by monetary policy. The purpose of monetary policy is crucial in ensuring price stability and general confidentiality of the currency. Its three main goals focus on promoting employment, balancing long lasting interest rates and stabilizing prices.
There have been controversies regarding transparency about the economy and monetary policy. However, I believe transparency is the way to go, but clarity and other measures have to be taken to ensure effectiveness. There are also accrued benefits in adopting this strategy. However, the Feds should solicit tools and techniques to deal with inflation, recession and influencing the economy.
The FOMC highlights quarterly economic forecasts and outlooks yearly. Their prediction was for growth above two percent. The future economic outlook is brighter but accurate measures, and standards have to be taken to balance the economy while preventing inflation and recession (Blinder et al., 2008). Transparency in economics and monetary policy is essential and is accrued to various benefits. First, it promotes democratic accountability and also improves bank reputation. Transparency also helps the bank enhance its flexibility in response to economic shocks which ensures corrective inflation anticipation target by the public. Certainty regarding the Feds motives and plans eventually reduces inflation bias and enhances social welfare. However, for this to be effective the Feds have to give clear and accurate information to the public pertinent to the Feds decisions (Vanhoose, 2008). It enhances significant stability in commercial markets while contributing to the greater strength of the economy.
Similarly, monetary policy transparency can also be a breakthrough for the growth of the economy. The accrued benefits will include reduced rates and variability of inflation, decreased variability of output and increased accuracy in the private sector forecast. To ensure useful results transparency means providing clear and effective communication. Transparency revolves around three distinct areas that are, instruments, implementation and goals transparency.
These areas of transparency can complement each other thus ensuring effective success. However, there are always drawbacks to transparency one being over-reaction of the market participants to information released by the central banks (Williams, 2010).
Importantly, two techniques can be used to reduce this problem through partial publicity and partial transparency. One-sided publicity entails limiting the fraction of market participants with access to public information. Partial transparency involves the release of ambiguous general information to all market participants.
These strategies help reduce the overreaction of market participants.
Increased inflation and recession are factors that can significantly impact the economy. To balance inflation, the Fed must apply the contractionary monetary strategy, decreasing economic growth. The Fed can also use certain instruments in reducing inflation. They include; operating open markets, increasing reserve requirements as well as discount rates. More so, to counter the recession, the Fed should incorporate tools such as; Open Market Operations, adjusting reserve requirements and influence on market perceptions (Hetzel, 2009). These strategies are effective in ensuring stabilization of prices, reducing unemployment and controlling long term interest rates.
In conclusion, the Fed has a big responsibility of ensuring stability in the economy while controlling the influx in inflation and recession. The use of monetary policy and transparency are essential in ensuring the success of the United States central bank. However, other strategies and tools must be put into consideration to prevent public uncertainty as well as the overreaction of market participation. All these strategies, laws and rules must be balanced to enhance the stability of the economy.
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Blinder, A. S., Ehrmann, M., Fratzscher, M., De Haan, J., & Jansen, D. J. (2008). Central bank communication and monetary policy: A survey of theory and evidence. Journal of Economic Literature, 46(4), 910-45.
Hetzel, R. L. (2009). Monetary policy in the 2008-2009 recession. FRB Richmond Economic Quarterly, 95(2), 201-233.
VanHoose, D. D. (2008). Bank capital regulation, economic stability, and monetary policy: what does the academic literature tell us?. Atlantic Economic Journal, 36(1), 1-14.
Williams, J. (2010, September). Sailing into headwinds: the uncertain outlook for the US economy. In Presentation to Joint Meeting of the San Francisco and Salt Lake City Branch Boards of Directors, Salt Lake City, UT.