...Monetary Policy and Nominal Exchange Rates Federal Open Market Committee used to maintain a steady increase of the Federal Reserve’s balance sheet based on a policy of quantitative easing, which involves buying a considerable amount of assets, in order to increase the money supply, but it decided to reduce the pace of new purchases of assets, as a reaction to the recent economic growth. With this policy, FED will continue to buy assets but in a more moderate way so there will be less money injected in the economy. This means that the money supply increases now less than before but the impact in the short-‐term interest rates won’t be significant. However, in the long run, the situation is different, it is like as if you are decreasing the money supply because there’s a reduction in the injection of money in the economy by reducing purchases of assets. (This behaviour...
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...and consumption demands. In contrast, if a country has a negative capital and financial accounts, it will have a current account surplus, because the credit is more than the debit. It means that this country is using its saving for investing. In Singapore, the government is heavily managed the country’s economy. It promotes high levels of savings. Also, the Monetary Authority of Singapore focuses on accumulating foreign reserves. Consequently, Singapore became a net creditor to other countries. It has a large current account surplus and saving accumulation in excess of domestic investment demand, which lead to produce a long-term real appreciation of the SGD. 2. What is a real exchange rate? What determines real exchange rates in the long-run? Real Exchange Rate = Nominal Exchange Rate - Inflation It’s the ratio at which any country’s own currency is equivalent to other currencies in terms of purchasing power. It discounts inflation from the nominal interest rate. It also provides a better measurement of countries exchange rates. The Monetary Authority of Singapore focused mainly on inflation and didn’t use exchange rate as a competitive tool. Therefore, Singaporean companies had to find its way in competing with foreign producers without having unemployment problem....
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...CASE STUDY COMPONENTS: Introduction: Identify case study topic and list assertions (3-6) that can be verified with evidence (field notes, interviews, etc.) 1. Assertions and Evidence: Discuss each assertion separately (minimum one paragraph for each assertion) and include supportive evidence. Underline assertion statements as presented. 2. Implications/Effects: Conclude with an interpretive discussion of implications/effects. Inferences and conclusions based on evidence presented can be drawn. SAMPLE CASE STUDY FOCUSING ON MANAGEMENT STRATEGIES: Management Case Study Introduction Throughout the study, Shelley’s class was well managed. Explanations and evidence to support the following six assertions regarding Shelley’s management style are presented: 1. Shelley did not focus extensively on behavior management; 2. Shelley monitored student behavior throughout lessons; 3. Shelley promptly dealt with potential disruptive behavior; 4. Shelley reinforced acceptable behavior; 5. Shelley was very tolerant of student interaction and discussion; and, 6. Shelley devoted a great deal of time to task management. Assertions and Evidence Throughout the study, Shelley did not focus extensively on behavior management. On most days, the students in Shelley’s class were very well behaved and seemed to be familiar with Shelley’s rules regarding classroom behavior...
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...Monetary policy: Is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy. Expansionary Monetary Policy: Expansionary policy increases the total supply of money in the economy, and policy is traditionally used to combat unemployment in a recession by lowering interest rates. Contractionary Monetary Policy: Contractionary policy decreases the total money supply. and involves raising interest rates in order to combat inflation. Introduction: Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century...
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...Monetary Policy under Fixed Exchange Rates 1. CB attempts to stimulate economy (buys domestic assets) 2. E0 ⇒ E2 ; AA1 ⇒ AA2 3. But CB is pegging! Can’t allow depreciation to happen 4. So the CB sells foreign reserves to move E2 ⇒ E0 ⇑ (depreciation) 5. This brings exchange rate back to E0, and forces AA2 back to AA1 6. Monetary policy is ineffective under fixed exchange rates 1 Monetary policy ineffective under fixed exchange rates • With a fixed exchange rate, you give up on an independent monetary policy. You cannot use monetary policy to target domestic inflation or to try to smooth out the domestic business cycle • The only hope for independent monetary policy is capital controls to prevent traders buying or selling domestic currency • But capital controls reduce trade and foreign direct investment, and present opportunities for corruption 2 Fiscal Policy under Fixed Exchange Rates Fiscal policy is more effective under fixed exchange rates 1. Fiscal stimulus (increase spending; lower taxes increases aggregate demand (shifts DD to right) But this causes initial appreciation (fall in E); equil is at 2. To protect the peg, CB must buy foreign assets with home currency. This increases the domestic money supply, which moves economy to final equil 3 (higher output) Fiscal policy is potent because it causes both the DD and the AA schedules to shift 3 2. ⇓ (appreciation) 3. 4. Disadvantages of Fixed Exchange Rates • With a fixed...
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...Chapter 8 The Policy Trilemma in Open Economies Chapters 6 and 7 discussed the choice of an exchange rate regime as a monetary policy instrument, and examined the advantages and disadvantages of pursuing fixed versus floating exchange rate regimes under perfect capital mobility. Under each regime, we considered the effectiveness of fiscal policy, effectiveness of conventional monetary policy (ability to influence domestic short term interest rates), and exchange rate stability. We found that, although only a credible fixed exchange rate regime achieves bilateral exchange rate stability, no single exchange rate regime entirely dominates the other in terms of the effectiveness of monetary and fiscal policies. These findings suggest that the choice of an exchange rate regime presents genuine tradeoffs for policy makers, and it is time to discuss several factors that would guide such a choice in practice. In reality, hard pegs and floats represent the two idealized extremes of a spectrum of exchange rate regimes. Within that spectrum, there is a variety of options available to policy makers, but these options require additional policy instruments. One such policy instrument is capital controls, which affect the incentives underlying international capital mobility. So, in this chapter we discuss the form and consequences of these capital controls as a policy instrument. Given that capital controls constitute a third policy instrument, it is useful conceptualize policy choices using three intermediate...
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...CHAPTER 3 THE INTERNATIONAL MONETARY SYSTEM The purpose of this chapter is to help students understand what the international monetary system is and how the choice of system affects currency values. It also provides a historical background of the international monetary system. This enables students to gain perspective when trying to interpret the likely consequences of new policies in the area of international finance. This chapter describes how exchange rates are determined under four different mechanisms--free float, managed float, fixed-rate system, and target-zone system. Under the latter three systems, governments intervene in the currency markets in one form or another to affect the exchange rate. Key Points 1. Under the latter three systems, which involve varying degrees of central bank intervention, the real exchange rate is liable to change, with important implications for exchange risk management (as discussed in Chapters 9 through 11). 2. Regardless of the form of intervention, fixed rates don't remain fixed for long. Neither do floating rates. The basic reason that exchange rates don't stay fixed for long in either a fixed- or floating-rate system is that governments subordinate exchange rate considerations to domestic political considerations. 3. The gold standard is a specific type of fixed exchange rate system, one that required participating countries to maintain the value of their currencies in terms of gold. Calls for a new gold standard...
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...investigates the effects of Monetary policy on some significant economic variables like exchange rate, gross domestic product and inflation using data from 1960-2010 to analyze the results. We have taken the data in percentage form. A great number of empirical studies on the relationships of monetary policy and inflation are available and most of these have analyzed the effectiveness of monetary policy in controlling inflation in Pakistan. In this paper we have presented the effectiveness of monetary policy it’s framework and data estimation through which we reached to the conclusion that monetary shocks do affect real variables like GDP, inflation and exchange rate. Pakistan has been estimated by a number of researchers and it has been recognized that monetary phenomenon are responsible for the high levels of inflation. Keywords: Monetary Policy, Inflation, Exchange rate, Economic Growth, Gross domestic product and Pakistan. Introduction This paper attempts to examine the long-run effects of Monetary Policy on several economic variables such as inflation, economic growth that is gross domestic product and exchange rate in Pakistan. For this purpose, analysis have been employed for the period 1960-2010. As monetary policy actions affect policy variables with a significant gap and with high degree of unpredictability and insecurity, it is key to predict the probable impact and degree of monetary policy actions on the real variables. Usually, policy makers and central banks...
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...Monetary policy Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.[1][2] The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or concretionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.[3] Overview Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance...
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...The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka C.Amarasekara 1 Abstract Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth. The...
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...2012 The Monetary Transmission Mechanism in Nigeria: A Sectoral Output Analysis Philip Ifeakachukwu, NWOSA (Correspondence author) Department of Economics, Accounting and Finance Bells University of Technology, Ota, Ogun State, Nigeria Tel: 234-082-470-7555 E-mail: nwosaphilip@yahoo.com Muibi Olufemi, SAIBU Dept of Economics, Obafemi Awolowo University Ile-Ife, Osun State, Nigeria Tel: 234-085-338-1914 Received: May 31, 2011 doi:10.5539/ijef.v4n1p204 Abstract E-mail: omosaibu@yahoo.com Published: January 1, 2012 Accepted: July 5, 2011 URL: http://dx.doi.org/10.5539/ijef.v4n1p204 The study investigated the transmission channels of monetary policy impulses on sectoral output growth in Nigeria for the period 1986 to 2009. Secondary quarterly data were used for the study while granger causality and Vector Auto-regressive Method of analysis were utilized. The results showed that interest rate channel was most effective in transmitting monetary policy to Agriculture and Manufacturing sectors while exchange rate channel was most effective for transmitting monetary policy to Building/Construction, Mining, Service and Wholesale/Retail sectors. The study concluded that interest rate and exchange rate policies were the most effective monetary policy measures in stimulating sectoral output growth in Nigeria. Keywords: Sectoral output, Monetary transmission channels, Granger causality, VAR model 1. Introduction The channels through which monetary policy impulse is being...
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...9-204-037 JANUARY 6, 2004 MIHIR A. DESAI MARK F. VEBLEN Exchange Rate Policy at the Monetary Authority of Singapore Dr. Khor Hoe Ee, Assistant Managing Director, Monetary Authority of Singapore (MAS), reviewed the year-end economic data for 2001. He had just met with a number of his colleagues and now paged through the statistics they had discussed. Dr. Khor wondered whether the monetary system that has served Singapore so well since the late 1970s—and had filled the void left by the collapse of the Bretton Woods currency system—was still the best model for Singapore to follow. Singapore’s managed float, sometimes referred to by journalists as a “dirty float,” stood in contrast to the systems used by some of its neighbors: Hong Kong had remained strongly committed to its peg against the U.S. dollar, and Australia had just recently shifted to a completely floating regime. A key item on the agenda for the Monetary Policy Committee meeting at the end of January was to review and set monetary policy in response to the changing economic environment. As head of the MAS’s Economics Department, Dr. Khor knew that he was responsible for recommending a policy response that would be consistent with Singapore’s strategy for sustainable economic growth with price stability as well as supporting Singapore’s role as a major global financial center. A great deal had happened in the domain of monetary policy in the last five years, much of which posed challenges for Singapore...
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...What is monetary policy? The action of a central bank, currency board and other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserve). Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. Monetary Policy Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Monetary policy rests on the relationship between the rates of interest in an economy that is the price at which money can be borrowed, and the total supply of money. The official goals usually include relatively stable prices and low unemployment. The regulation of the money supply and interest rates by a Central Bank of Bangladesh in order to control inflation and stabilize currency. By impacting the effecting cost of money, the Bangladesh Bank as a controller of monetary policy can affect the amount of money that is spent by consumers and businesses. The objectives of a monetary policy...
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...RBI & Its Monetary Policies Table of Contents NO. | Particulars | 1. | Introduction of RBI | 2. | Monetary policy | 3. | Monetary policy objectives | 4. | Monetary policy functions | 5. | Operations of Monetary policy * Quantitative credit control * Selective or qualitative methods | 6. | Operating procedures of Monetary policy * Liquidity adjustment facility (LAF) * Market stabilization scheme | 7. | Monetary policy tools | 8. | Recent changes in Monetary policy | 9. | Evaluation of Monetary policy | 10. | Limitations | 11. | Conclusion | 12. | Bibliography | 13. | | 14. | | 15. | | 16. | | INTRODUCTION OF RBI The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government...
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...Monetary Policy of Bangladesh Lecture Synopsis: 2 NSU, MBA Program Dr. Salehuddin Ahmed(Sld) BUS 530 (Section – 1 & 2); SPRING, 2013 Introduction Both in developed and developing economies, monetary policy seeks to maintain price stability accompanied by sustained stable output growth in the face of internal and external shocks that are faced from time to time. For developing economies like Bangladesh with significant underemployment/under exploitation of production factors, stimulating higher growth is imperative for rapid reduction and eventual elimination of endemic poverty, and is therefore an overriding priority. The stimulus provided by monetary policy in accommodating the growth aspirations must not however jeopardize macroeconomic stability and future growth; and the pursuit of monetary policy comprises of various supportive measures to attain the highest sustainable output growth while adjusting smoothly to internal and external shocks that the economy encounter from time to time. History and Objectives of Bangladesh Monetary Policy Objectives of the monetary policy of the Bangladesh Bank as outlined in the Bangladesh Bank Order, 1972 comprise of attaining and maintaining of price stability, high levels of production, employment and economic growth. In the decades of seventies and eighties, monetary policy in Bangladesh was conducted with full direct control on interest rates and exchange rates, as also on the volumes and directions of credit flows...
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