Financial Institutions and Monetary Theory - Research Proposal Example

FINANCIAL INSTITUTION AND MONETARY THEORY Student’s Name Course Professor’s Name University City Financial Institution and Monetary Theory Global financial crisis depends on the effectiveness of the monetary policies especially in the developed countries making a significant section of the global economy issue. Unprecedented monetary policy approach has been applied in the OECD countries. This covers the interest rate evaluation and cutting to almost zero whereby the central banks seeks to maintain interest rate low for long in order to expand massively in borrowing. This was one of the strategies for the central bank through the monetary policy response in safeguarding the financial crisis recession in the financial market. The aim was t stabilize the crises and avoiding inflation that hovered implicit and explicit inflation expectation targets. The study seeks to express monetary and fiscal microeconomic and macroeconomic factors that contributed to financial crises. The major concern is how these policies enhance recovery from the recession and maintaining inflation to a standard economic index. The central banks of the OECD countries developed different approaches in sustaining the OECD economy depending on the external factors during the financial crisis. Therefore, the study focuses on the global financial crisis, contributing factors, the role of monetary and fiscal policies in stabilizing the economy. Since the financial crisis in 2007/2008, some years later some parts of the world economy had not yet recovered. The approach considers the development of the appropriate financial policies and systems that would integrate real economy. The policy maker advice on the monetary policy considered inducement of the stimulus in the economy would ensure economic boost and growth (Shiller, 2012). The expansionary process was the substantial stimulus that provided benefits in recovery process through increasing the money supply in the economy. Lowering interest rate for the investors, commercial banks and individuals improved access to money that was subjected to economy development (Davide, 2012). The accommodative monetary approach was considered to be counterproductive by delaying restructuring long run balance sheets and hence undermining the central bank credibility. Therefore, the policy makers, especially on the financial and monetary policy, considered the expansionary process in restoring economy. At the wider perspective of the global financial crisis, the New Keynesian model approach expresses inflation stabilization being similar or equivalent to the stabilization of relevant welfare output gap. This is under the position of monetary policy to be countercyclical. Central banks are supposed to enhance the inflation situation through conducing monetary policy divine coincidence (Patrice, 2015). The major contribution of the monetary policy is to smoothen the business cycle and countercyclical monetary approach in enhancing long-term economic growth. The Central Bank has the role of stabilizing both inflation and output level in enhancing economic performance. Monetary policies effectiveness can be affected and hence be limited during the severe recession due to the impairment of the monetary transmission mechanisms (Ball, 2014). Traditional New Keynesian model association with the financial outfit has led to dissatisfaction on the implementation of the monetary process. Therefore, financial friction has influenced the central bank operation through setting appropriate mechanism to control the crises. Literature Review The monetary policy depends on the economic situation and policy makers understanding on the economic development. During the financial crisis, OECD countries developed a strategic approach in regard to the response and restricting the economic to improve on performance and growth. The central banks from these countries came up with a strategic approach that governed the regional trading toward achievement of economic development. The approach was concerned on the fiscal and monetary expansion to enable the investors, commercial banks and individuals to access short term government bonds. It also restructured the interest rate in order to improve in borrowing and restructure of the economic through development and growth. Other institutions such as World Bank and International Monetary Fund enhanced the economic restructure to developing world economic monetary and fiscal policies that aimed in enhancing economic performance. This was meant to ensure the rate of inflation was controlled and improving on the macroeconomic and microeconomic models. Therefore, the structure of the OECD countries was reinforced by the World Bank and IMF to enhance economic stability. Nature of Monetary Policy The expansionary policy was the monetary policy that controlled the financial crises through increasing the total supply of printed money in the economy. The Central Bank initiate supply of money in the economy more rapidly that the normal process with the aim of boosting the economic activities. This is done through maintaining low-interest rates that induce or attracts investors, companies and banks to borrow. The Central Bank encourages the borrowing through setting low-interest rates as an incentive ejecting more money in the economy (Hong-Ghi, 2012). In addition, Central Bank applies quantitative easing through the expansionary monetary policy in purchasing assets from other organizations such as banks. The major objective is lowering the yields on the bonds and creation of a cheaper platform for the banks borrowing. This contributes in boosting the capacity of the banks in lending to other businesses and individuals. Furthermore, the process of the expansionary monetary process requires be monitoring and controlling as it risks ramping up inflation and hence Central Bank should have limiting factors to consider while ejecting or influencing money supply policy. Type of the Monetary Policy Implemented During the Financial Crises and Expected Economic Outcome Expected The monetary policy process is defined through the objective depending on inflation crisis. The expansionary monetary policy is described as accommodative if the Central Bank intends creation of the economic growth through setting favorable interest rates. The neutral state of the expansionary policy is administered central bank does not neither want to create growth nor inflation control. If the central bank aims at reducing the inflation rate, it has to apply process of lowering the interest rates to enable borrowing (Davide, 2012). The expansionary monetary policy is enhanced by the Central Bank to stimulate the economy through short-term government bands offers targeting short-term market buyers through lowering interest rates. The measure of the short-term interest rates whether it is contributing in controlling inflation crisis is the rate approaching to zero and hence central bank realizes the effect to economy. The monetary authority is supposed to apply other stimulating factors that attract buying of the assets that have long-term maturity. OECD Countries worked toward development of appropriate fiscal and monetary policy to control the exchange rate of currency during international trade. The approach enabled to transact under measure of one strong currency that provided equivalent in value of other countries respective currencies. The major concern was to ascertain the stability of the currency and prevention of the inflation reoccurring. The other macroeconomic approach is the balance of payment whereby the countries initiated to balance export with the imports. This was a process of controlling the surplus that would result from overexploitation. GDP helps in measuring the gross development of the output and hence giving clear indication of development and achievement of the both monetary and fiscal policies. Causes of the Global Financial Crisis A part of the monetary process, other factors and policies contributed to the global financial crisis. These policies include: Fiscal Policy Like the monetary policy, fiscal policy is also an economic tool that is used by the central bank and other institutions in controlling the economic performance and the in particular inflation. The fiscal policy is applied in encountering the economic bust and hence used in accounting on the economic performance (Davide, 2012). Fiscal policy works on both peak and recession period perfectly as it provides the measure of the GDP balance that is essential in the monetary gauge. The approach to the fiscal policy is providing GDP information that helps in covering the economic position regarding the unemployment and inflation level. Fiscal policy is considered as more of the expansionary process that is essential in covering the recession cycles that are associated with the financial crisis (Patrice, 2015). Through the fiscal process, the country is in a position of providing the general overview of the economy performances and relating to the monetary policies approach. The central bank uses the fiscal process in developing the economic position and addressing the macroeconomic features that help in influencing the interest rates. The financial crisis recovery required an expansionary fiscal process in restoring the normal recessions and hence controlling the global crisis from reoccurring (Hong-Ghi, 2012). The OECD countries had exemplary emerged their fiscal factors through addressing the macroeconomic factors under the fiscal policies that seek in controlling the collective economic problems that can lead to financial crisis. International Economics and Exchange Rate In international economic relation, the exchange rate plays a major role in enhancing the economic development. The countries especially OECD tends to control exchange rate regarding movement and other economic conditions that are experienced in abroad. The exchange rate depreciation sometimes is considered to boost the economic output and production and hence assisting in the repair of organizations and corporate financial positions (Davide, 2012). This is recorded in financial balance sheets that are enhanced by the increased productivity and hence competitiveness and profit. The export approach is considered as an avenue of the exchange rate and hence contributing to the currency variation depending on demand at the abroad country. The major concerns are the rate of exchange and how interest rate influences the financial position of the country (Patrice, 2015). The control mechanisms should be enhanced through the having real effective exchange rate that should be the measure of the country trading terms and the rate of global GDP growth. The balance of payment being the macroeconomic factor should be used in enhancing the ratio of export and imports to have controlled channels that address the financial situations to prevent a crisis. During the financial crisis recession, it is important to consider measuring all the economic variables. This helps in rating the depreciation that is encountered through the exchange rate and formulating platform of the financial crisis recovery as a subsequent process. The process enhances the trade increase in terms of competitiveness and having positive effects that arise from the strength of financial crisis recovery. The financial crisis is a result of both monetary and fiscal policies that are essential for economic stability. Both monetary and fiscal policies indicate the microeconomic and macroeconomic approach in the restoration of the financial crisis (Hong-Ghi, 2012). The post-global financial crisis led the OECD countries enhanced the development of economic standards that enhanced both fiscal and monetary aspects through connecting the inflation management. Unemployment, interest rate, exchange rate and balance of payment are underlying factors under the fiscal process that directly or indirectly influences inflation (Patrice, 2015). Another approach is through money supply control through the expansionary process, and contradictory process helps in controlling the rate of inflation. Therefore, it is essential to consider the changes that are experienced in the financial crisis, the contributing factors and how it should be controlled through the appropriate policies by central banks. Research Methodology Research methodology explains research methods applied in the study of the global financial crisis in respect to the financial and fiscal policies applied in OECD countries. There various strategy and procedure used in the study of the financial crisis in the OECD countries through secondary resources. The major resources were obtained from the secondary resources such as articles and publication from the central bank. The financial crisis was a global issue, and hence, corrective measures were involved in rectifying the problem. The approach used was initiated by the financial and monetary policy from the central bank with respect to the inflation rate. Research Design The financial crisis occurred during 2007/2008 indicate how central bank through the monetary policy was able in restoring the economic growth. The study is explanatory and predictive that indicates the economic development. The policy under the monetary and fiscal approach explains the theory applied by the research in developing a viable approach toward the financial crisis. The policy was applied in a manner of predicting the economic response to the financial crisis experienced. Furthermore, the study is qualitative analysis whereby different theories have been used in the explanation of the economic condition in respect to microeconomic and macroeconomic. Data Sources and Collection Techniques The source of data is secondary that is obtained from the library achieves, newspaper recording, articles, and central bank publication. These sources have been extensively applied in the research in developing the financial crisis history, especially on 2007/2008 period. The major consideration is the achievement of the appropriate information that covers the financial and monetary policy and fiscal application. Theories such as New Keynesian model has been used in the development of the financial crisis and how it was rectified. The data collection techniques applied covers the only the strategy applied by the various central banks of OECD countries. The collective measures were essential in controlling the financial crises through enhancing models regarding international trade. The issue of the currency under the interest rate is strengthened through exchange rate and hence giving appropriate approach in responding to the regional economic development. Therefore, the study considered using the secondary source of information and application of the data collection techniques that achieved from central bank publications. References Read More