Should the Fed Focus on the Role of Money in the Conduct of Monetary Policy - Research Paper Example

Should the Fed Focus on the Role of Money in the Conduct of Monetary Policy? Introduction When investors are ready to endow their money into projects, it is imperative that they include a clear picture about future economic development (Bordo & Filardo 510). They basically seek a reduction in risk before investing their money (Smets 1260). Due to this, decision makers need clarity about price rises, joblessness, interest rates plus economic escalation. The government can influence these factors through monetary policy (MCcallum 1787).

Using its fiscal ability to direct the supply and accessibility of money, a regime attempts to create solidity in its economy (Bordo & Filardo 510). However, there are often differences about the approaches that policymakers choose when performing financial policy (Smets 1261). The Federal Reserve currently focuses its influence on the federal funds rate to realize maximum sustainable expansion and price stability (Khan & Benolkin 8). According to Khan & Benolkin, the central funds rate entails the interest rate that a depositing body gives immediately current funds (balances at the Federal Reserve) to another body whose aim is to deposit (8).

Unlike in the past, the Fed does not denote targets or monitoring ranges for monetary aggregates (Khan & Benolkin 8). Mishkin defines monetary aggregates as M1 and M2. M1 and M2 measure the total value of the money supply in an economy (Khan & Benolkin 7). M1 entails Currency, Traveler’s Checks, Demand Deposits plus Other Checkable Accounts. M2 involves Small value Time Deposits, Savings Deposits plus Money Market Deposit Accounts, and Money Market Mutual Fund Shares (Khan & Benolkin 8). In this paper, I want to argue if the Fed should focus on the role of money in the conduct of monetary policy (Khan & Benolkin 8).

The fed should include monetary aggregates in its monetary policy Although the Federal Reserve and the ECB perspective on the role of money are different, the Federal Reserve should involve monetary aggregates in the monetary policy (Bordo & Filardo 510). The Federal Reserve achieves this by participating in market operations in order to change the supply of money (Bordo & Filardo 510). Inclusion of the aggregates would be fundamental in scoping the future conditions of the economy. This is possible through utilizing the aggregates as economic indicators where important parameters are under scrutiny (Bordo & Filardo 511).

Since monetary policy in Federal Reserve plays a bigger role of ensuring growth sustainability and considerable prices, utilization of aggregates are significant for improving this state (Bordo & Filardo 510). Moreover, the Federal Reserve can conduct adequate research on the importance of monetary aggregates and change its view of aggregates to incorporate policy issues largely. The monitory aggregates are vital for governments which aim is to mark inflation because they help in altering money supply, thus affecting liquidity (Bordo & Filardo 512).

The Federal Reserve can utilize the aggregates for issues such as policy stance incorporating monitoring rates of interests. When there are low inflations, the federal government can utilize the aggregates to guide monitory policy (Bordo & Filardo 511). In various occasions, interest rates can be useful in providing guidance for policy. This is possible when inflation drops and the economic measures associate prices with appropriate policies (Bordo & Filardo 511). Incorporation of monitory aggregates in the Federal Reserve would be profitable in improving economic status because open market buying can bring down interest rates to the ground level (Bordo & Filardo 512).

This is possible even with no occurrence of economic stimulus (Bordo & Filardo 512). To enhance economic growth, the Federal Reserve should include aggregates. Research shows a strong relationship between various advancements in economy (Bordo & Filardo 512). A vivid study is fundamental in order to determine the significance of aggregates in various economies. This will aid the choice of monitory targeting (Bordo & Filardo 513). How the ECB handles monetary policy in Europe ECB’s monitory policy serves the purpose of maintaining the stability of prices.

The ECB utilizes monitory and economic analysis to achieve its objectives (Khan & Benolkin 8). Economic plus monitory analysis ensures evaluation plus organization of information which would be useful in determining the risk for stability of prices (Khan & Benolkin 8). Economic analyses phenomenon relates the macroeconomic projections exercise in which ECB employees performs the evaluation and identification of economic issues plus inflation (Khan & Benolkin 9). The staff has the responsibility of producing forecasts of inflation and economic issues for future years (Khan & Benolkin 9).

The monetary analysis support entails implications of funds plus credit advancements for inflation and economic functions. The QMA document is responsible for analysis of financial aggregates proceedings in order to draw the implications for inflation and financial policy (Khan & Benolkin 9). This process concentrates on minor fluctuations although it provides implications of financial growth for changes in inflation for a defined period. The criteria allow conveyance of information from dissimilar sources incorporating various resources and yields (Khan & Benolkin 10).

The QMA enhances assessment via the use of various sections, for example, one involves monitory information advancements while another utilizes tools to reveal monetary proceedings that have occurred recently. A section exists that relates risks to cost firmness (Khan & Benolkin 12). The QMA tools are money demand, critical analysis of growth factors, and the inflation forecast. ECB utilizes these tools in the policy procedures and decision making. Presently, ECB uses advanced models that enable the use of equations (Khan & Benolkin 13).

Works Cited Khan, George A., and Scott Benolkin. “The Role of Money in Monetary Policy: Why Do the Fed and ECB See It So Differently?” Federal Reserve Bank of Kansas City, Economic Review (2007): 5-36. Print. Bordo, Michael, and Andrew Filardo. “Money Still Makes the World Go Round: The Zonal View.” Journal of the European Economic Association 5.3 (2007): 509–523. Print. Smets, Frank. “Discussion of Putting 'M' Back in Monetary Policy" by Eric Leeper and Jennifer Roush. Journal of Money, Credit, and Banking 35.

6 (December 2003): 1258-1264. MCcallum, Bennett t. “How Important Is Money in the Conduct of Monetary Policy? A Comment.” Journal of Money, Credit and Banking 40.8 (December 2008): 1784-1790.