Conflicts In Monetary Policy Essay

815 words - 3 pages

Goals of monetary policy are to 'promote maximum employment, inflation(stabilizing prices), and economic growth.' If economists believe it's possibleto achieve all the goals at once, the goals are inconsistent. There arelimitations to monetary policy.The term 'maximum employment' means that we should try to hold theunemployment rate as low as possible without pushing it below whateconomists call the natural rate or the full- employment rate. Pushingunemployment below that level would cause inflation to rise and thereby ruinthe other objective--stable prices, economic growth, which is our objectivesin the long run.Overall financial stability will lead to a better balance between consumptionand saving that will make resources available for investment purposes, reducechanges in the economy created by the inflation in the past, and by thereactions of savers, as well as fostering high and sustainable economicgrowth; and contribute towards an investor friendly environment that willattract foreign investors to the country.Evidence has suggested that economies perform better, in terms of growth,employment and living standards, in low inflation environments than they dowhen inflation is persistently high. This evidence is a comparison acrosscountries over long periods. The association between economic performance,measured by growth of output or growth of productivity, and inflation. Thisindicates a negative relation; that is, the higher the inflation, the lower therate of real growth.Evidence suggesting that low inflation promotes growth has motivatedrecent decisions by a number of central banks and governments, most notablyNew Zealand. Canada, the United Kingdom and Sweden also have moved inrecent years to establish monetary policy with official low inflation targets.Decisions to adopt a policy objective of low inflation suggest that otherpolicy-makers are reading the evidence pertaining to inflation and growth aswe are.Consistent attempts to expand the economy beyond its potential forproduction will result in higher and higher inflation, while ultimately failingto produce lower average unemployment. Therefore, most economists wouldargue that there are no long-term gains from consistently pursuingexpansionary policies.Monetary policy can determine the economy's average rate of inflation inthe long run. And that's important for the economy, because high inflationcan hinder economic growth. For example, when inflation is high, it alsotends to vary a lot, and that makes people uncertain about what inflation willbe in the future. That uncertainty can hinder economic growth in a couple ofways--it adds an inflation risk premium to long-term interest rates and itcomplicates the planning and contracting by business and labor that are soessential to capital formation. High inflation also hinders economic growth inother ways. For...

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