This is often because the monetary authorities in developing countries are mostly not independent of the government, so good monetary policy takes a backseat to the political desires of the government or is used to pursue other non-monetary goals. Raymond P. Kent defines monetary policy as Harry G. Johnson defines monetary policy as a The control of credit in the economic system or the adoption of a definite monetary policy is done with a specific objective. These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain the exchange rate. A rational agent has clear preferences, models uncertainty via expected values of variables or functions of variables, and always chooses to perform the action with the optimal expected outcome for itself among all feasible actions – they maximize their utility. Therefore, the rate of inflation at home must equal the rate of inflation in the foreign country plus the rate of depreciation of the exchange rate of the home country currency, relative to the other. Although it is one of the government’s most important economic tools, most economists think monetary policy is best conducted by a central bank (or some similar agency) that is independent of the elected government. [7] Phillips curve#NAIRU and rational expectations, Interaction between monetary and fiscal policies, Expansionary Monetary Policy: Definition, Purpose, Tools, Contractionary Monetary Policy: Definition, Examples, "History of the Bank of England - Bank of England", "Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective", "Milton Friedman and U.S. Monetary History: 1961-2006", "Permanent QE and helicopter money | Bruegel", Money and risk in a DSGE framework: A Bayesian application to the Eurozone, "Nominal GDP Targeting: A Simple Rule to Improve Fed Performance", "Central bank losses and monetary policy rules: A DSGE investigation", "On the desirability of nominal GDP targeting", http://www.igmchicago.org/surveys/fed-appointments, "Demand Imbalances, Exchange Rate Misalignments and Monetary Policy", "Targeting Inflation: The United Kingdom in Retrospect", "Inflation Targeting Has Been A Successful Monetary Policy Strategy", "Thoughts on the zero lower bound in relation with monetary and financial stability". In this case there is a black market exchange rate where the currency trades at its market/unofficial rate. Monetary Financing. It was also increasingly understood that interest rates had an effect on the entire economy, in no small part because of appreciation for the marginal revolution in economics, which demonstrated that people would change their decisions based on changes in their economic trade-offs. The classical view holds that international macroeconomic interdependence is only relevant if it affects domestic output gaps and inflation, and monetary policy prescriptions can abstract from openness without harm. This belief stems from academic research, some 30 years ago, that emphasized the problem of time inconsistency. In an ideal world, such monetary authorities should work completely independent of influence from the government, political pressure, or any other policy-making authorities. A new view on monetary policy. Commercial banks then have more money to lend, so they reduce lending rates, making loans less expensive. Central banks can choose to maintain a fixed interest rate at all times, or just temporarily. Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy. Developing countries may have problems establishing an effective operating monetary policy. [21] After the 1980s, however, central banks have shifted away from policies that focus on money supply targeting, because of the uncertainty that real output growth introduces. During the period 1870–1920, the industrialized nations established central banking systems, with one of the last being the Federal Reserve in 1913. Using these anchors may prove more complicated for certain exchange rate regimes. While monetary policy typically focuses on a price signal of one form or another, this approach is focused on monetary quantities. As a part of expansionary monetary policy, the monetary authority often lowers the interest rates through various measures, serving to promote spending and make money-saving relatively unfavorable. This can avoid interference from the government and may lead to the adoption of monetary policy as carried out in the anchor nation. The inflation targeting approach to monetary policy approach was pioneered in New Zealand. But even with a seemingly independent central bank, a central bank whose hands are not tied to the anti-inflation policy might be deemed as not fully credible; in this case there is an advantage to be had by the central bank being in some way bound to follow through on its policy pronouncements, lending it credibility. For example, if the central bank wishes to decrease interest rates (executing expansionary monetary policy), it purchases government debt, thereby increasing the amount of cash in circulation or crediting banks' reserve accounts. For instance, the monetary authority may look at macroeconomic numbers such as gross domestic product (GDP) and inflation, industry/sector-specific growth rates and associated figures, as well as geopolitical developments in international markets—including oil embargos or trade tariffs. Countries may decide to use a fixed exchange rate monetary regime in order to take advantage of price stability and control inflation. Monetary policy, the demand side of economic policy, refers to the actions undertaken by a nation's central bank to control money supply and achieve macroeconomic goals that promote sustainable economic growth. The Federal Reserve Bank is in charge of monetary policy in the United States. Simply put, it is the Fed's responsibility to balance economic growth and inflation. Such developments have a long-lasting impact on the overall economy, as well as on specific industry sectors or markets. Virtues of such money shock include the decrease of household risk aversion and the increase in demand, boosting both inflation and the output gap.

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