Sunday, April 14, 2013

Conflicts in Monetary Policy

Goals of fiscal policy are to promote maximum employment, flash

(stabilizing prices), and economic harvest-festival. If economists counter up its possible

to achieve all the goals at once, the goals are inconsistent. There are

limitations to monetary policy.

The term maximum employment means that we should try to hold the

unemployment rate as pocket-sized as possible without pushing it below what

economists call the natural rate or the full- employment rate. Pushing

unemployment below that direct would cause rising prices to rise and thereby ruin

the other objective--stable prices, economic growth, which is our objectives

in the long run.

Overall financial stability will lead to a better balance between consumption

and saving that will cast off resources available for investment purposes, reduce

changes in the economy created by the rising prices in the past, and by the

reactions of savers, as well as bringing up high and sustainable economic

growth; and contribute towards an investor friendly environment that will

attract hostile 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 do

when inflation is persistently high. This evidence is a coincidence across

countries over long periods. The association between economic performance,

measured by growth of output or growth of productivity, and inflation.

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This

indicates a disconfirming relation; that is, the higher the inflation, the lower the

rate of real growth.

Evidence suggesting that low inflation promotes growth has motivated

recent decisions by a number of central banks and governments, roughly notably

New Zealand. Canada, the United Kingdom and Sweden also have moved in

recent geezerhood to establish monetary policy with official low inflation targets.

Decisions to adopt a policy objective of low inflation suggest that other

policy-makers are reading the evidence pertaining to inflation and growth as

we are.

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