The Role of Monetary Policy and Central Banks in Recession and Financial Stability and Liquidity Shocks
Abstract
The role of the central bank and monetary policy in the financial stability, fight against recession and maintaining the liquidity shock is visible in both developing and developed economies. The central bank has to shape its roles and streamline the monetary policy to enable the effectiveness of the financial systems. From the wage rate to financial policies, the central bank comes up with different strategies to enhance financial stability. Financial stability is a symbol of economic growth and development. Fighting against recession through banks and policy is also a single option for the country. In a recession, the bank and monetary policy have to demonstrate their roles when controlling the credit, increasing the value of the local currency, and balancing the interest rate. Also, reducing the impact on liquidity shock in a recession or crisis is also a part of the role of the central bank and monetary policy. The central bank and monetary are sources for the government to get rid of negative or unfavorable consequences in the economy. The central bank can propose strategies or regulate financial institutions in the country to enable economic growth and development. Business development, employment, and GDP growth are some key measures in this regard.
Keywords: Central Bank, Monetary Policy, Role, Economic Growth
Introduction
The goal of the current research is to focus on the role of central banks and the effectiveness of monetary policies. However, the objectives of the research are two concerns on the role of central banks in an economy; there is also a focus on the evaluation regarding the effectiveness of the monetary policies. Regarding the role of monetary policy and central banks, it is concerned that these policies can be used to ensure economically. However, for financial stability, there is a need to conduct monetary policy so that the nation or country can achieve low and stable inflation and there could be secured from the global financial crisis. In Keynesian economics, also known as the macroeconomic theories, there is a focus on the short run approaches especially during a recession. Thus, central banks have expanded their toolkits so that through using monetary policy so there could be effective in the economy and so that banks could effectively deal with risks (Schularick & Taylor, 2012).
Effectiveness in the Financial Stability
For the benefits in the economy and to get effectiveness in financial stability, the monetary policy is adopted by central banks. To manage volatile exchange rates, the central banks can streamline their role and make use of clear policy frameworks so that there could be the achievement of the central bank objectives. For the effectiveness of the central bank’s policies, there is also IMF support for the countries around the world. In recent years the increase in the monetary policies by the large central banks can be seen as the Fed has made more than six rate hikes to follow the policy. The effectiveness of the monetary policies is considered, and thus, there is an increase in the implementation. From December 2013 to August 2018 there is an increase in the adoption of policies, which can be seen by 6% (Becker & Milliman, 2018).
Source: (Becker & Milliman, 2018)
IMF depicts its role and supports through providing policy advice as well as technical assistance. These central banks conduct monetary policy to achieve price stability as well as to manage economic fluctuations. The monetary policy framework focuses on the central banks so that there may not be issues in the management of the inflation rate. It is analyzed that in the late 1980s; inflation was targeting various countries in this way; the central banks of the countries have developed the leading framework based on the monetary policy so that there could be an explicit inflation target. Lower-income countries are also targeting the monetary policy framework. However, central banks conduct monetary policy to adjust, the better supply of money as well as to operate the market operations effectively.
The role of central bank and monetary policy is also in the limelight due to increases in the money supply through the process known as “monetary easing” so that economies could be saved from the global financial crisis. In the advanced economies, the central banks are reducing interest rates to achieve inflation targets. Central banks use monetary policy to increase real wages through a focus on the increase in the size of the investment. The use of monetary policy is also helpful for the country as it could maintain from the great recession. The use of monetary policy is helpful to save the economy from the issues related to the sub-prime mortgage crisis. The expansionary monetary policy has the focus or intentions to reduce the general price level. National banks have extended their toolboxes so that through utilizing the financial arrangement there could be viable in the economy, thus that banks could adequately manage the dangers (Blanchard & Gali, 2010).
· Value of Local Currency and Money Supply
It has been revealed that the central bank usually streamlines its role when increasing the value of local currency. Financial stability can be attained by the central bank by issuing the money according to needs. It seems a single authority that regulates money, even in a recession. It is seen that the central bank depicts its monopoly in issuing notes. Thus, when maintaining the effectiveness of financial stability, the central bank can portray its role without any internal or external interventions. Another role of the central bank in the country is to regulate commercial banks. Regulating commercial banks is a process of making some rules and regulations along with some key operational implications. All commercial banks in the country work under central banks. Effectiveness can be attained through aligning with rules and regulations. It is a good approach to integrate with the rules and regulations of central banks because it brings financial stability in the country (Chand, 2017).
· Adjusting the Money Demand and Supply
The role of monetary policy is also quite visible in economic development. The monetary policy of the country usually plays its roles through adjusting the money demand and supply. It has been observed that the increase in per capita income and economic growth also increases the money demand. An increase in money demand is necessary to carry out daily transactions. Financial stability will occur if authorities increase the supply of money, according to the increase in the income level of people. Adequate money to make the transactions in the country is a source of financial stability. Interestingly, the effective adjustment in the money demand and supply causes the effectiveness of financial stability.
The financial stability of the country depends on price stability. The role of the monetary policy is to keep the constant vigil on the price movement. The stable price enables regulated money supply, and it depicts stability.
· Credit Control
Credit control is also one of the most prominent roles of monetary policy. Authorities in the country usually depict different techniques of credit control. The purpose of using these techniques is to streamline pertinent production and investment patterns. It is a fact that the monetary authorities make the policy that regulates credit institutions in the country. Interestingly, in many developing countries, the banking system is not strong. Thus, the strong monetary policy is the best source for regulating investment. It is interrelated with the effectiveness of financial stability. Financial stability occurs when it comes to the regulation of different financial institutions. In a developed or developing economy, credit institutions are triggered by monetary policy. Interestingly, the role of monetary policy is quite visible in economic development and growth. With the growing economy, policy is the key source of improving the credit system. Based on the effective monetary policy, credit institutions usually demonstrate larger credit facilities to enhance the visibility of the production in the country. An adequate credit facility shows financial stability. For Instance, the policy can rationalize its role by paying attention to rural credit. The rural credit is effective to meet the needs of rural areas of the countries. It is a key provider in the developing economy. Stabilizing the realities in the countries through this policy is a good move to contribute to economic development.
· Balancing Interest Rates
Financial stability can be gained in the country by keeping a balance regarding interest rates. Based on the economic conditions, the low-interest rate policy can help investors take more money from financial institutions and make pertinent investments. On the other hand, the high-interest policy may restrict investors from taking money from banks. However, authorities claim that low-interest rate policy cannot be implemented for the long run. To stimulate savings in the country, it seems imperative to keep the balance to enable financial stability.
Fight for the Next Recession
It is analyzed in the article that the role of central bank and monetary policy is quite visible, as far as the fight for the next generation is concerned. Through focusing on the fiscal stimulus, the monetary policies need to be considered as these strategies are ideal. The best budget needs to be decided on the monetary policies by the managers of the benefits in the booming economy. Monetary policies if effectively implemented by the central banks, then there could be critical investments; it is a recession-fighting tool that provides the adequacy of the national bank’s approaches, there is likewise the IMF underpins for the nations around the globe. Through implementing this policy, there is a better response for the financial specialists as there will be a favor for money related arrangement over the monetary approach in light of the fact; it will also boost risk-taking (The Economist, 2017).
In the American economy through a focus on the monetary policy there is an increase in the size of the investment, and thus, the American economy is getting various benefits. The Federal Reserve in the countries is changing monetary policy so that there could be preferences for the use of monetary policies. In the developed economies, neo-classical economics is concerned for the better role of central banks in an economy, to satisfy the major economic goals; polices are given values and evaluation is done for the effectiveness of the monetary policies (Blinder, 2010).
To lower down the recession and deflationary trends, capitalist economies are favored because it can be helpful in the period of boom. The current research paper focuses on analyzing the relationship that is between monetary policy and central banks; however, the policy is focused on the order to cause full-employment as well as high-inflation. The central bank focuses on bringing inflation to the desired level through implementing the policies of the central banks. The majority of economists preferred monetary policy over fiscal policy because there are concerns related to purchasing power intact. Monetary policy does not have the large size of risks; therefore, monetary policy roles are more favorable in the majority of economists (The Economist, 2017).
The study focuses on the major lessons regarding the monetary policy and central banks; the study analyzed that economy when faced the financial crisis and uncertainty; the liquidity focused by the banks to maintain the efficiency of the interbank lending market. However, it is concerned that central banks took steps for allocating funds through using the monetary policy and optimal policy. Banks can also get adequacy in the money related solidness the fiscal arrangement is received by national banks (Gambacorta, Hofmann, & Peersman, 2014).
· Leveraging Wage Rate
Fighting the recession is a big challenge for many countries. However, these financial institutions play a vital role in facing these challenges. For Instance, in a recession, central banks intend to decrease or support to decrease the wage rate in the country. When the wage rate decreases, both private and public organizations can increase employment. Thus, it can be said that the employment rate can be increased in inflation. These banks utilize the advantage of benefits of inflation in the country, and therefore, they look forward to streamlining employment (Pettinger, 2017).
· Reducing and increasing interest Rates
The best thing that central banks can do in the recession is to reduce the interest rate to enhance the visibility of enhancements. Investment in the country is important during the recession. Instead of giving space to companies to switch operations, decreasing the integrated rate can create another opportunity for companies to make pertinent decisions regarding business operations and expansions. The role of the central bank in the country during the recession is also to increase the employment and income level of people. People will have new employment opportunities in the country, and it can help to get rid of different consequences. The effectiveness of the bank is in the limelight due to its flexibility. During the recession, the bank can increase the time limit for borrowers to pay back their loans. Thus, it is the best way for the accumulation of the finished goods (Opentextbc.Ca, 2018).
· Affirmative Actions
On the other hand, using monetary policy to fight recession has become a key trend in both developing and developed economies. For Instance, the policy and bank regulations support the use of power to enhance countercyclical actions. Interestingly, the role of monetary policy can be used to decrease the consequences. The bank can shape the policy to depict an adequate money supply. Also, the number of loans can be increased. The recession is a great threat to the economy, putting the aggregated demand to the right is the best option to eliminate or decrease the consequences. However, in the case of inflation in the country, the contractionary monetary policy can be used to decrease the money supply. Effective monetary policy can help to increase government spending and reduce taxation to create moiré space. The most important thing is to make the whole financial or monetary system of the country flexible through central banks and monetary policy to fight the recession.
Maintain the Liquidity Shocks
The research examines the relationship between the money related approach and central bank; that to maintain the liquidity shocks; as well as the liquidity-shock crisis the bank effectively considered the large disparity in the liquidity, and there was the focus on the prudential regulation and monetary policy, etc. Moreover, to maintain the aggregate liquidity crisis in the central banks, the banks are managing the volume of liquidity through considering effective policies and through maintaining the interest rates by monetary policy. Monetary policy is concerned as the liquidity injection that could help to increase the probability and also help to manage the macroeconomic effects. For the maintenance of the global financial crisis in the economic activities, monetary policies are settled by the economies (Freixas, Martin, & Skeie, 2011).
The study focuses on the functional roles of the central banks and monetary policy that how central banks maintain price stability and financial stability. It has discussed in the study that through a focus on the financing needs the monetary policies are supporting the inflation tax rate and lead fiscal approach with a specific end goal to change the better supply of cash and additionally to successfully work the market tasks. Through the monetary role of central banks, there is the specific end goal to oversee unstable trade rates; the national banks make utilization of clear approach structures so that there could be the accomplishment of the national bank destinations. Moreover, there is also focused attention on money and credit fluctuations (Goodhart, 2011).
The American economy is getting different advantages through implementing policies and through utilization of money related arrangement is likewise useful for the nation as it could keep up from the immense retreat and safe economy from the financial crises.
In the United States of America, the economic growth is to be controlled through the control of the financial system liquidity. The United States has three different monetary tools to attain goals and objectives. For Instance, even in a recession, the central bank usually sets the reserve requirement. It regulates banks regarding lending. Every bank working under the central bank may contain limitations regarding lending. The second option of the US central bank is to use open market operation. The third option is to set different interest rate targets. Based on the different economic situation, the bank can alter interest rates to create a favorable impact (Amadeo, 2018).
The research analyzes that in the years 1870-2008; there were financial crises, and through the implementation of the central policies and policy responses the behavior of money improved, and nations get the benefits. It is concerned that through macroeconomic indicators the financial crisis episodes get leverage in the financial and there was an effective response to financial crises. The policymakers focus on the regulatory ease and credit system by making policies. Moreover, the monetary aggregates and there are major developed economies through marinating the stable relationship of the monetary policies in the financial system. The negative economic effects were also reduced through the financial crises (Schularick & Taylor, 2012).
· Maintaining through central Bank Money
Maintaining liquidity shocks in the country, especially in the recession, has become a big challenge for the government. The role of the central bank is a kind of alternative to get rid of this problem. For Instance, the proactive injection of money from the central bank is the big solution to maintain or reduce the liquidity shocks. The bank can use its reserves, especially foreign currency reserves, to decrease liquidity shock. The concept of macro-prudential liquidity buffer has emerged as a key solution. Using systematic liquid assets is a good approach. The central bank may contain liquid assets even in crises. It is only the central bank that can help financial institutions to create some prevention strategies. The most important thing is to reduce or eliminate liquidity shock, especially in a recession or crisis. In an American economy, the role of central banks to limit the liquidity shocks is visible (Hardy, 2015).
Conclusion
It can be concluded through researching that monetary policy should be emphasized as it could be helpful in achieving the inflation targets to increase real wages, however, not in the long run. Moreover, the use of the monetary policy of the central banks can also increase the size of investment in the American economy. With the management of the role of central banks; there can be job, money related arrangement and national banks it is noticed that these approaches can be utilized keeping in mind the end goal to guarantee financial matters. The study emphasized the effectiveness of financial stability, fight against recession, and maintenance of liquidity shock through the central bank and the monetary policy. As far as the future recession is concerned, the role is to be reshaped or revised to get things done according to expectations.
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