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Monetary Policy & International Finance and the Exchange Rate - Essay Example

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If the central bank has a fixed interest rates, an increase is the demand for researves often results into a consequential increase in the money in circulation. At any given time, an increase in demand for reserves translates into an increase in the governemnt budgets target…
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Monetary Policy & International Finance and the Exchange Rate
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Download file to see previous pages The supply curve analysis indicates that an increase in the amount of nonborrowed reserves implies there will be right shift in the supply curve. The implication is that the governemnt funds rate will not rise any further and a constant value may be achieved. As a result, the open market purchase will result into a rise in the monetary base and hence the monetary supply.
The central bank uses rediscount operations which allows the banks to borrow from the central as part of its checks and measures on economic stability. While this approach is crucial for ensuring that there is no economic recession, there is evidence that there is danger when the central banks lends to other banks. One problem with this operation is that it prevents banks that would have failed from failing. While the failure of bank may be a sign of economic instability, there are many other causes for the collapse of banks. For instance, poor management strategies within a bank may result to its failure (Kashyap & Stein, 2004). While there is need to support banks and to prevent them from collapsing, there are times when lending to such banks does not solve the problem. Banks that have weak management should be streamline their operation rather than lend them, an approach that may not its problems. Therefore lending to banks that are in the verge of collapsing poses danger to the public as they feel that such a bank is stable while it dependent on borrowing.
III. Compare the use of open-market-operations, central bank lending facilities (rediscounting), and changes in reserve requirements to control the money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.
The open-market operations are one of the most flexible approaches of controlling the money supply. Since this method is under the control of the government, it is possible to use it to fine tune the market and to achieve ...Download file to see next pagesRead More
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