Is Monetary Policy Overburdened - Literature review Example

A Summary of the Article, “Is Monetary Policy Overburdened?” By Athanasios Orphanides The consequences of the global financial crisis of 2007 to 2009 have led to the government dependence on the monetary policy for solutions. The governments’ public policies are overburdening the monetary policy that controls the demand and supply of money. The monetary policy seems to be overburdened due to goals that for achieving full employment, fiscal sustainability and finance stabilization. Although overburdening the monetary policy will finally diminish, price instabilities will still exist because the central banks will be under control of the supply of money (Orphanides 2013, p. 1). The monetary policy, today, is not expected to achieve goals it used to achieve before. Unemployment and inflation are speculated to persist if overburdening of the monetary policy continues. Whenever the employment rates suddenly increases, the central bank is forced to print more money for salaries, but, this is not a solution to inflation. During the crisis, central banks focused on price stability and at this time, they became independent institutions dominating the control of inflation without interference from the government. At that time, they achieved their goal in controlling inflation, but in 2008 and 2009, the inflation rate started increasing. The governments doubted on the credibility of central banks in maintaining price stability. Today, most central banks are not independent in their operations and that is why public policies from the government are overburdening the monetary policies. Price stability may not be realized if the public policies continue to overburden the monetary policies posing a threat to economies in the future (Orphanides 2013, p. 2). The monetary policy is aimed at stabilizing the price levels of goods and commodities in accordance with the state of the economy. The global financial crisis incorporated inflation which led to continued increase in unemployment rates. Governments rushed to reduce their spending and reduce unemployment rates that resulted to overburdening of the monetary policy. The monetary policy has been practiced before and deflation was achieved, and thus, stabilizing the price levels. Before the financial crisis, discussions on what constitutes a good monetary policy run among the major central banks where they agreed on the practice of targeting inflation (Orphanides 2013, p. 2). At the first stages of the global financial crisis, disappointing growth was associated with many economies. The real GDP was maintained in countries like US, United Kingdom and Japan. Citizens had good prospects on the growth of their economies only to realize, two years later, that the real GDP was continuously falling. The fall in growth of economies at this time contributed to government spending in attempts to revive the previous level of growth. Now that the money held by the government has reduced after six years, an attempt to print more money or to achieve full employment has overburdened the monetary policy (Orphanides 2013, p. 3). The unemployment rates increased around the globe during the global financial crisis in 2007. It started with countries like the US, Japan and the United Kingdom where unemployment rates sometimes reached double digits. The high unemployment rates at that time represented a global economy failure. The monetary policy should not aim at reducing the rates of unemployment because to some extent, it cannot achieve price stability. However, focusing on unemployment by encompassing other policies that promote job creation and investments can achieve price stability in the long run. Strengthening the labor markets is one way of reducing unemployment rate in the long run. For example, the aggregate demand in Japan is good enough for reducing unemployment rates but currently they are experiencing high rates of unemployment due to their weak labor markets (Orphanides 2013, p. 4) The monetary policies cannot increase the potential GDP levels and at the same time achieve sustainable economic growth. In 2007, during the crisis the disappointing growth led to low rates of unemployment, but later, the rates rose continuously because, at that time governments were unable to control inflation. Today, the governments and the central banks cannot achieve control of inflation by enforcing full employment. This is because the money demanded will exceed the money supplied due to poor monetary policies (Orphanides 2013, p. 4). To achieve fiscal sustainability governments ought to adjust their spending paths in consideration of their long- term growth prospects and taxing powers. The fiscal policies formulated by the government are not a responsibility of the central banks to implement them. Today, governments have a tendency of using their central banks in financing their spending and thus increase the risk of overburdening the monetary policies. However, the monetary policy can sustain government financing where central banks reduce the interest rates for the benefit of all borrowers including governments. The gross debts in countries like US and United Kingdom slightly reduced during the aftermath of the crisis but later, the debts rose continuously up to date. The governments’ borrowings from central banks overburden the monetary policy such that fiscal balance is achieved at first, but later, the fiscal balance is undermined (Orphanides 2013, p. 12). In efforts to maintain financial stability in the economy, the monetary policy is overburdened since the governments will provide subsidies and incentives to firms with an aim of reducing price levels. Great deviations of the price levels contribute to instability whereas small or no price level deviations contributes to financial stability. When the governments subsidize the prices of commodities with the aim of achieving financial stability, it counter-attacks with the central banks’ control of inflation through their monetary policy. During the global crisis governments funded industries aimed at reducing price levels in order to maintain financial stability, but later, the price levels rose continuously (Orphanides 2013, p. 15). The author of the article explains the aftermath of the crisis based on how the monetary policy was overburdened by the governments. Details on the aftermath of are given; the first countries by affected the crisis, the real GDP and unemployment rates of those countries and finally graph representing the economic paths up to date (Orphanides 2013, p. 23) In 2007, central banks were independent institutions that dealt with monetary policies. One year later, governments approached the central banks for finance so that they could maintain their fiscal balances. As a result, there was a fall in the gross debts but at the same time overburdened the monetary policy because, the debts later rose continuously (Orphanides 2013, p. 24) The author has developed a point, good enough to describe the fact that the monetary policies are overburdened even today, and that, there is a possibility of failure in achieving fiscal sustainability in the future. Analysis of the main article has been done well by the author. In the first place, he describes the governments’ dependence on central banks in solving economic problems such as inflation, and fiscal imbalance. Further explanations on the role of central banks are provided in the article. The overburdening of the monetary policy is brought about by three issues that include; the efforts in achieving full employment, ensuring price stability and fiscal sustainability. The author explains each of the three issues basing his arguments from the statistical data of the crisis and how that data affects the contemporary economies. The relationship between the issues’ contribution to overburdening the monetary policy is explained well by factual statements. For example, governments will provide incentives to entrepreneurs to start more firms in case there is a sudden increase in the unemployment rates, in order to ensure there is financial stability (Orphanides 2013, p. 26). The article has expounded all the issues equally, giving much detailed information. The issue of achieving full employment includes much information with the same meaning. The author has explained much on the inflation target (IT) practice as a good monetary policy aimed at prospecting the future of inflation. IT practice has contributed to the success of monetary policies, for example, in New Zealand (Orphanides 2013, p. 5). Introduction and global crisis aftermath sections have been explained well with adequate information. The author has also provided plotted graphs related to the Real GDP, the unemployment rate and gross debts. Readers, therefore, have access to data that they can use for their understanding of the content of the article. For example, one can use the unemployment rate curve to analyze why the author states that, in the aftermath of the crisis, the unemployment rate decreased, but later, it increases continuously (Orphanides 2013, p. 27). The arrangement of the article is credible and can be assigned to students for research. It has included; an abstract, an introduction section, body section that contains explanations of the main issues, a conclusion and references. The author introduces the reader on what is contained in the article, but, before addressing the issues contributing to overburdening of monetary policy, he gives the reader a brief history of the global financial crisis and its aftermath. The title of the article is explained in the introduction section where the author introduces controversial arguments and statements aimed at improving the reader’s attitude towards the title. Although, the reader has read through the abstract, the controversial statements in the first paragraph will inspire the serious readers to read the whole article. The article explains the nature of the recent global financial crisis, its effects and attempts to minimize such effects. The article is a relevant source of information to researchers specifying on the solutions to global financial crisis of 2007 and 2009. The governments and the public expect the central banks to find solutions to the economic crises, but in actual sense, they have monetary policy making it hard for the central banks to solve the situation. This statement can be debatable when finding out whether it is true that the governments are overburdening the monetary policy through their demands for financial support from the central banks. The article is also relevant to readers, as when one reads the facts and arguments in the article, he/she can understand why the consequences of the 2007 global financial crisis are still felt up to date. References List Orphanides, A. (2013). Is Monetary Policy Overburdened? Boston, Massachusetts Institute of Technology. Read More