Example Of Monetary Policies Of Central Banks Of USA To Achieve Financial Stability Article Review
This essay will shed some light on the monetary policies of Central Banks of USA to fight against economic instability and compare their approach with Bank of Canada.
Greenspan Put was a popular monetary policy implemented by Alan Greenspan, the former Chairman of the USA Federal Reserve Board and other members of FED from 1987 till 2006 . This monetary policy refers to the strategy of supporting the securities markets by reducing the interest rates and hence, directing the money flows into the markets. This term was introduced in 1998 when FED reduced interest rates after the failure of Long-Term Capital Management.
Monetary Actions of FED and ECB to Achieve Financial Stability
The monetary policy makers must balance output objectives and price. The main targets of Central Banks like ECB are to control inflation, stabilize output, and persist the economy at full employment. FED carries a clear “dual mandate” from the US Congress. It recognizes the employment goals and emphasizes these objectives on same grounds as inflation goals.
The Central Banks aim to develop resilient monetary policies against economic fluctuations. These policies will absorb the market shocks in a better way as compared to the Greenspan Put strategies. The economic outlook should be the focus on policy making instead of paying heed to temporary market fluctuations.
The monetary policies of Central Banks like ECB and FED have been quite successful fighting against economic bubbles and absorbing subtle market shocks. The temporary results might show the economy is declining, but long-term approach certainly keeps the financial situation stable.
Difference in Approach of Bank of Canada as Compared to Central Banks USA (150)
According to Stephen Poloz, Governor of Bank of Canada, the economy of Canada is suffering from the recent reduction in oil prices. He suggested a policy in an announcement made on January 21, 2015 related to cutting the interest rates to absorb the shocks of economic fluctuations. Poloz reduced the trend settings rate from 1% to 0.75% . Poloz was anticipating the reduction in employment following due to falling oil prices. Therefore, he adjusted the interest rate without conceiving the situation in the long run.
You can easily see the difference between monetary policies of Bank of Canada and those of USA. The former is trying to be proactive based on temporary fluctuations in economy. The latter focuses on the long term resilience and stability of the economy. ECB and FED don’t act in a big way for temporary financial bubbles in the market.
Main Points of Article (150)
The important points of the article for financial policy makers are presented below:
Overall economic situation should be the basis for policy making instead of following the rapid economic fluctuations.
Widespread deviation from risks in situations of financial downtimes can lead to further economic declines.
Central Banks of USA kept interest rates almost constant in spite of economic fluctuations.
FED is likely to focus on how financial situations and incoming data are influencing its medium-term objectives rather than acting on certain market signals.
If the institutions have good capital buffers, they will be less affected by the volatility in financial situations.
Bank of Canada, (2015). Opening Statement by Stephen S. Poloz Governor of the Bank of Canada. Monetary Policy Report 21 January 2015.
Torres, C. (2015). Yellen Leaves Greenspan ‘Put’ Behind as She Charts Rate Increase. BloombergBusiness.
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