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International monetary policy - Term Paper Example

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Monetary policy also ensures controlling inflation, employment, exchange rate volatility and economic growth (Fender, 2012). It is functioned through…
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International monetary policy
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Download file to see previous pages Under that regime higher employment and sustainable economic growth was regarded through low inflation as one of the theoretical framework of monetary policy (Solow & Taylor, 1998). The effects of money supply decisions are transmitted through interest rate channel through the economy. The transmission mechanism in the economy is not as simple as it seems since there are uncertainties about timings, expectations, exchange rate, interest rate and balance of payments (Canada, 1999).
This traditional framework of monetary policy has been effective for the domestic and closed economies but with the changing scenarios of economic integration and interdependence. This emergence of new economic activities across borders gave birth to a new dimension of monetary policy which was named as International Monetary Policy. International monetary policy analyses the effects of policy decisions over international finances of a country through exchange rates (Odell, 1982). Monetary policy only overlook the domestic aspect of interest rate while in international monetary policy the focus is more on balance of payments and on balance of trade. Policy decision of money supply lead to appreciation/ depreciation of currency while other factors remain same due to which exchange rate may overshoot instantly. Considering such complications and impediments, international monetary policy can serve the purpose to achieve target through either stabilizing exchange rate or through fixed exchange rate or through currency unions or through dollarization (Scammell, 1975). So, traditional monetary policy doctrine failed to capture the independent nature of monetary policy. The regime of International monetary policy was first acknowledged around four decades ago which recognized the international monetary policy spill over and helped in reconsidering and reshaping the macroeconomic and open economy monetary models.
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