The Role of Monetary Policy and Central Banks-Proposal

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 Error: Reference source not found.

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 Error: Reference source not found. 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

Most 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 suggests 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.

Progress Report of Proposal

I have chosen the topic of “The Role of Monetary Policy and the Central Banks” for my research study. I came around this topic when I was going through an article in which the role of money was discussed. While I was finding areas which can be of interest to me, I found that the way Central Banks manage and have control over the overall monetary policy of an economy and how it impacts other economies was the most interesting for me. Even with all the ambiguity of the role of money in an economy, the emphasis is always on the management of the supply and demand of the money in an economy.

After finalizing my topic of interest, I decided on the main objective of the research. As I wanted the research to be comprehensive and instrumental in showing the role and effectiveness of monetary policy, I decided on researching the role of Central Banks and the effectiveness of its monetary policy. For making my topic more specific, I am going to be assessing the effectiveness of the monetary policy, particularly in the realizing of major economic goals.

I am very excited about researching a specific issue with regards to the role of monetary policy. The preference that is given by the economists to monetary policy over fiscal policy has been found to be ineffective. Many studies conducted on this specific issue would be analyzed in this respect to find out if it is true that the effectiveness of the monetary policy over fiscal policy is indeed proved to be lower. To conclude, the proposal for this topic for research is put forward to not only aid in extending the research in this area, but also to expand my knowledge in my area of interest.