7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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PROFESSOR JOSEPH AGHOLOR

Professor of International Finance

and Financial Institutions

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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AT THE OUTSET IN THE UNITED KINGDOM, THEROLE OF THE MONETARY POLICY WAS TORESTS WITH THE CENTRAL BANK AND THEGOVERNMENT.THE GOAL OF THE MONETARY POLICY WAS TOKEEP THE INTEREST RATE LOW THROUGHDIRECT CONTROLS AND OR MONETARY

EXPANSION.

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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GENERALLY, WHY THE CENTRAL BANK ISACTIVELY INVOLVED WITH THE CONTROL OFMONETARY POLICY THE TREASURY) HASGREAT INFLUENCE OVER THE WAY MONETARYPOLICY SHOULD BE CONDUCTED. HOWEVER, THE INFLUENCE OF THE CENTRAL

BANKS AUTONOMY IN THE CONDUCT OFMONETARY POLICY FOR PRICE STABILTY,CANNOT BE OVER EMPHASISED

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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A KEY COMPONENT OF ECONOMICPOLICY IT RELATES TO OFFICIAL ACTIONSTAKEN BY CENTRAL BANK TO CHANGEMONETARY AND FINANCIALCONDITIONS

THE CONDITIONS MUST BE WITHINTHE OPERATIONAL CONDITIONS IN

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MONETARY POLICY CAN RELATE TO THEACHEIVEMENTS OF THE CENTRAL BANKSOFFICIAL OBJECTIVES NAMELY :i) LOWER INFLATIONii) ENHANCE MENT OF STEADY ECONOMICGROWTHiii) FOSTERING FINANCIAL AND MONETARYEQUILIBRIUM IN THE BALANCE OF PAYMENTS

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iv) MAINTAINING SOUND ECONOMIC ANDEXCHANGE RATE STABILITYv) ENHANCE MENT OF ADEQUATE BANKCREDITS AND RESERVESvi) FOSTERING THE EFFECTIVENESS OFEXCHANGE RATES ARRANGEMENTS,MONETARY POLICY FRAMEWORKS ANDCONTROLS

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vii) MONETARY POLICY PROVIDES A TOOLFOR ADEQUATE AND SOUNDREGULATIONS OVER CAPITAL FLOWSviii) MONETARY POLICY CAN SERVE ASMECHANISMS DESIGNED TO IMPLEMENTGOVERNMENT FINANCIAL DECISIONS BYCENTRAL BANKS TO ACHIEVE THENATIONAL AND WELL DEFINEDECONOMIC GOALS

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ix) IN THE BALANCE, THE IMPACT ONMONETARY POLICY ON AGGREGATEDEMAND FOR GOODS AND SERVICESDEPENDS ON THE RESPONSES OF THECONSUMERS AND PRODUCT USERS.

x) IT ALSO RELATES TO INVESTORS TOCHANGES IN THE MONETARY ANDFINANCIAL CONDITIONS OF THECENTRAL BANKS AND THEIR POLICYACTIONS

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UNTIL RECENTLY, MONETARY POLICIES HADBEEN USED TO ACHIEVE MULTIPLEOBJECTIVES.THE MAIN USES OF THIS POLICY INCLUDE: ECONOMIC GROWTH POVERTY ALLEVIATION AMELIORATION OF BUSINESS CYCLES

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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TO MAINTAIN AND ACHIEVE EFFECTIVE PRICESTABILITY IT ENSURES THE EXPANSION OF AN

AGGREGATE DEMAND DURING A RECESSION AN EXPANSIONARY MONETARY POLICY CANHELP TOACHEIVE FULL EMPLOYMENT

ESPECIALLY IF THERE WERE NO LIQUIDITYTRAP OR INVESTMENT PESSIMISM

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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MONETARY POLICY SERVES AS THEROLE FOR THE CREATION OF ASTABLE MACRO ECONOMICENVIRONMENT

THIS CAN ARISE WHERE REALECONOMIC FORCES OPERATE

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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MONETARY EXPANSION HAS ALASTING EFFECT ON THE PRICE LEVEL,NOT ON OUTPUT OR EMPLOYMENT INFLATION IS COSTLY, BOTH IN TERMSOF RESOURCE ALLOCATION ANDLONG TERM OUTPUT GROWTH.

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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MONETARY POLICY HAS A TRANSITORYEFFECT ON A NUMBER OF REAL VARIABLES MONETARY POLICY ALSO AFFECTS THEINFLATION RATES WITH LAGS OFUNCERTAIN DURATION. THE IMPACT CAN BE OF VARIALBLESTRENGTHS WHICH CAN UNDERMINE THECENTR L B NKS BILITY TO CONTROLINFLATION ON A PERIOD BY PERIOD BASIS

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THE ARGUMENTS FOR IMPLEMENTINGMONETARY POLICY

(a) TO CONTROL INFLATION

(i) IT MAKES MONETARY POLICYTRANSPARENT AND CREDIBLE

(ii) ALLOWS THE CENTRAL BANK TO BEINDEPENDENT, YET STILL ACCOUNTABLE

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7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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CENTRAL BANKS AND MONETARY POLICYARE ESSENTIAL MECHANISMS FOR GROWTH

a) PRICE STABILITY AS THE SOLE OROVERRIDING OBJECTIVE OF MONETARYPOLICYb) MONETARY POLICY FOR TAMININGBUSINESS CYCLES

PRICE STABILITY AS A MEANS OF AHEALTHY ECONOMY

7/22/2019 Central Banks Monetary Policies 2nd Week Lecture 24th to 29th March 2014 (22.39)

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MONETARY POLICY SHOULD AVOID TIMEINCONSISTENCY

INCONSISTENCY IN MONETARY POLICY IS AMAJOR PROBLEM THAT POLICY- MAKERSGENERALLY FACEHAVING DUAL GOALS INFLATION ANDFULL-EMPLOYMENT IN POLICYFORMULATION AND IMPLEMENTATION AREESSENTIAL PRIORITY PROGRAMMES OF THECENTRAL BANK

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CHOICE OF MONETARY POLICY RULESIT BRINGS PRICE STABILITY BY

IMPOSING CONTROL OVER MONETARYAGGREGATE AND ITS GROWTH RATE MONETARY POLICY SHOULD BEFORWARD LOOKING, NOT TO WAIT UNTIL INFLATION IS IMMINENT

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MONETRAY POLICY RELATES TO THE SUPPLYAND PRICE OF MONEY IN THE ECONOMY.THE PRIMARY OBJECTIVE IS TO CONTROL

INFLATION. IF THE MONETARY POLICY ISLOOSE, IT LEADS TO MORE BORROWING.THIS COULD LEAD TO INFLATION ANDEXTERNAL DEFICIT. IF MONETARY POLICY ISTIGHT, IT MAY SLOW DOWN DEMAND ANDOUTPUT COULD LEAD TO MORE JOB LOSSES

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INCREASE IN INTEREST RATE DISCOURAGESSPENDING. CONSUMERS COUL BEENCOURAGED TO SAVE WITH HIGH INTERESTRATES. THERE WOULD BE RISES IN MORTGATEREPAYMENTS. THE HIGHER COSTS OFCREDITS COULD DETER BORROWERS. THECORPORATE INVESTMENTS WOULD DECLINEAS WITH SMALL AND MEDIUM SIZEDINVESTMENTS. THE PUBLIC SECTOR COULDBEGIN TO LOOSE CONFIDENCE IN THEECONOMY

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INFLATION IS DEFINED AS PERSISTENT

INCREASE IN THE LEVEL OF PRICES.

INFLATION ARISES BY DEMAND- PULL,

COST INCREASES, EXPECTIONAL

CIRCUMSTANCES, DISRUPTION OF

BUSINESS PLANNING, REAL VALUE OF

SAVINGS IS REDUCED. HIGHER WAGE

DEMAND ON EMPLOYERS. OPERATIONSAND PRICE MECHANISMS ARE DISTORED

AND COULD LEAD TO UNEMPLOYMENT.

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