Identify Topic
The topic which I have selected is The Role of Monetary Policy and Central Banks. Monetary policy is an intriguing subject, because in economics the role of money is very ambiguous, especially in neoclassical economics. In Keynesian economics too, change in money supply produces results only in the short run. In the long run, money has a very nominal role. Despite this ambiguity regarding the role of money in an economy, central banks emphasize money-supply/monetary policy to bring about changes in the economy. For instance, to achieve inflation targets, increase real wages (in the short run, not in the long run) and to increase the size of investment (by altering interest rates), monetary policy is emphasized. To bring about any change in the economy, central banks play a major role, as they have the autonomy to change monetary policy (Woodford, 2011).
During the Great Recession, caused by the sub-prime mortgage crisis, the Federal Reserve employed an expansionary monetary policy that intended to reduce the general price level and increase the size of the investment. Currently, the American economy is heating up, which is why the Federal Reserve is changing its monetary policy, which again indicates that to bring about major changes in the economy, monetary-policy/money-supply is emphasized.
Purpose of Research
Economic systems, which are based on neo-classical economics, prefer the use of monetary policies to bring about desired changes. Most of the developed economies are based on neoclassical principles, which is why it is essential to study the structure/role of central banks and the effectiveness of monetary policies. The objectives of this academic exercise would be two; 1) study the role of central banks in an economy and 2) evaluate the effectiveness of the monetary policies in realizing major economic goals.
Monetary policy is not only considered an instrument employed to realize primary economic objectives (such as full-employment, healthy inflation rate, and high investment) but also it perceived as a line of defense against recessionary and deflationary trends.
Background Search
Capitalist economies are inherently unstable, which augments the role of monetary/financial institutions. For instance, capitalist economies periodically produce periods of booms and recession. During the period of boom, the economy swells at a very high rate causing full-employment, high-inflation and an increase in the size of investments. During the recessionary period (recession), economies shrink, causing the level of inflation, investment and employment to plummet. When such events occur at a greater frequency, and abruptly, they make the economy volatile. Therefore, it becomes essential for central banks to act proactively and bring changes in policy at a greater pace. For instance, if an economy starts to heat up, a central bank must employ a contractionary monetary policy, which is essential to keep inflation at the desired level and to purchase power intact (Cummins, 2018). In this study, we will focus on both expansionary and contractionary monetary policies of Central banks to understand their effectiveness. It will also address the question why monetary policies are preferred over fiscal policies. We will emphasize scholarly articles and reputed websites (such as The Economist) to gather information for analysis.
Specific Issue
The majority of economists assert that monetary policy must be preferred over fiscal policy, as monetary policies are more effective and their implementation does not have a large size of risks attached to it. However, evidence about the results of monetary policies that are implemented during time periods suggest that monetary policies may not be as effective as they were claimed to be by the majority of economists.
References
Cummins, J. (2018, July 5). Fed needs to wake up and admit the economy is overheating. Retrieved from https://www.ft.com/content/65868ba4-7dc7-11e8-bc55-50daf11b720d
Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. Princeton University Press.
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