1. Discuss the key criteria for success and the advantages of a central bank ado
ID: 1096638 • Letter: 1
Question
1. Discuss the key criteria for success and the advantages of a central bank adopting the framework of inflation targeting.
2. Consider the features of a desirable monetary policy instrument. Is the size of the Federal Reserve staff good policy instrument? Explain why or why not. Be sure to address which feature(s) it fits and which one(s) it doesn't.
3. Federal Reserve buying of mortgage-backed securities is an example of a targeted asset purchase, an unconventional tool of monetary policy. Explain how the Fed
Explanation / Answer
A central bank sets either the inflation rate or the interest rate. It sets a target for either of them and accordingly manages the market. For developing countries, the central bank usually targets the inflation, while for developed countries the central banks target the interest rate. The advantage is that of a big bank while virtually unlimited supply of money and power to correct the market.
Yes it is a good feature. At that scale and size it effectively moves the market the way it wants. The effectiveness has however decreased with the rise of countries like china which now hold significant US reserves and can on their own move the US market. So ven though the present structure is good it is not the best.
Sometimes the fed feels that there is no need for a broad market action that might be expensive and at the same time take longer. Going after specific targets allows fed to correct the particular segment of market while minimally affecting other segments.
The fed also guides the market on its outlook and can at times ask them to comply with certain directives. This gives the market an insight into the possible future course of action of the fed. So if the sentiment is positive, the interest rates may fall on the long term because of the belief of renewed investment.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.