Do the Pros of Monetary Policy Outweigh the Cons - Essay Example

However, as a stabilization policy monetary policy effectiveness as a tool of economic stabilization among other instruments of economic policy varies from one economy to another. This is as a result, of differences in the economic structures, divergence in the degrees of development in money and capital markets that result in varying degrees of economic progress, and the differences in the prevailing economic conditions. Monetary policy use over time has however, brought about controversy based on whether its applicability during periods of economic recession is beneficial or not.

The protagonists among the policy makers uphold the use of monetary policy as a means of adjusting the economy to the high levels of inflation. On the contrary, the antagonists do not support the use of monetary policy as a stabilization tool since they believe that the cons due to its use outweigh the pros gained when the government through the central bank applies monetary policy measures in the economy. It is therefore, worthwhile to see the impact of monetary policy on the economy in order to determine whether the use of monetary policy is beneficial or not.

Monetary policy effects during economic recession period when the markets are covered with inflation with the rapid increase in price and interest rates could be beneficial has it has a positive impact as a control measure. According to Keith Kuester’s article the recession period that recently unfolded prompted monetary and fiscal stabilization tools use by the policymakers in the United States and abroad as a means of mitigating the drastic economic downturn. Kuester (2011) further on describes how the economists largely depended on the use of monetary policy as a way of stabilizing the economy.

This is because monetary policy can be applied in order to reduce the interest rate in periods of economic recession by stimulating private demand. As a result, the contractionary monetary policy lowers the interest rate and subsequently influences government expenditure by lowering it through the decrease of the interest rate to up to close to zero percent as it cannot move to negative percent. On the other hand, the Economist Intelligence Unit (2010) also support the drastic measures by the government to reduce the interest rates of federal funds through the Federal reserve central bank in order to control the upsurge of economic recession from increasing further to extreme levels.

Jenkins & Eckert (2000) also asserts that the government through the central bank regulated the interest rate in order to control the money supply thus, reduce the rate of inflation. In addition, the use of monetary policy brings about stabilization of prices in the long run this is because it can control the slowing down of the inflation rate. Kuester (2011) affirms that at lower interest rate due to the monetary policy enforcement in place the private consumption and investment increases as they gain confidence in the stability of the economy.

This is because the household tend to presume the presence of a stable inflation and as a result, the households tend to save less and increase their demand for consumption goods. In addition, the Economist Intelligence Unit (2010) also affirms that after applying monetary policy on the economy oversees a recovery that continues to gain momentum as the spending of consumers increase significantly from an annualized rate of 1.6% up to 3.6% after a quarter. This is accompanied considerably by an increase in the gross domestic product.