Viewpoint: 2023 Vol: 29 Issue: 1
Nyerhovwo Prince, Delta State University
Citation Information: Prince, N. (2023). The effectiveness and limitations of monetary policy in achieving macroeconomic objectives. Journal of the International Academy for Case Studies, 29(1), 1-2.
Monetary policy is an important tool used by central banks to influence economic performance by controlling the money supply, interest rates, and exchange rates. This paper examines the effectiveness of monetary policy in achieving macroeconomic objectives such as economic growth, full employment, and price stability, and the limitations that can affect its effectiveness. While monetary policy has been successful in stabilizing the economy during crises, its effectiveness is subject to several limitations such as the timing and magnitude of its impact, the state of the economy, and the presence of other economic shocks. This study highlights the need for central banks to consider these limitations when implementing monetary policy to achieve their macroeconomic objectives.
Monetary Policy, Money Supply, Interest Rates, Exchange Rates, Macroeconomic Objectives, Price Stability, Open Market Operations, Federal Funds Rate, Quantitative Easing, Financial Markets.
Monetary policy is an essential tool used by central banks to influence the economy's performance by controlling the money supply, interest rates, and other monetary policy tools. The monetary policy aims to achieve macroeconomic objectives such as price stability, full employment, and economic growth. This research article aims to examine monetary policy and its effectiveness in achieving these macroeconomic objectives (Friedman, 1988).
Theoretical Framework
Monetary policy affects the economy through several channels, including the money supply, interest rates, and exchange rates. The money supply refers to the total amount of money in circulation in the economy, including cash, checking accounts, and other liquid assets. The central bank can control the money supply through open market operations, changing reserve requirements, and adjusting the discount rate (Goldberg et al., 2020).
Interest rates play a critical role in the economy as they influence consumption, investment, and savings. The central bank can influence interest rates by adjusting the federal funds rate, which is the rate at which banks lend and borrow funds overnight. When the central bank lowers the federal funds rate, it reduces the cost of borrowing, encouraging consumers and businesses to spend and invest more.
Exchange rates refer to the value of one currency in relation to another. The central bank can influence the exchange rate by buying and selling foreign currency in the foreign exchange market. When the central bank buys foreign currency, it increases the demand for that currency, raising its value relative to the domestic currency (Goodfriend, 2007; Goshit & Landi, 2014).
Effectiveness of Monetary Policy
Monetary policy has been a crucial tool in stabilizing the economy during times of crisis. During the 2008 financial crisis, central banks around the world implemented expansionary monetary policies to stimulate economic growth and prevent deflation. The Federal Reserve, for instance, lowered the federal funds rate to zero and engaged in quantitative easing, buying large amounts of government bonds to increase the money supply.
However, the effectiveness of monetary policy is subject to several limitations. First, monetary policy can take time to have an impact on the economy, and the timing and magnitude of the impact are uncertain. Second, the effectiveness of monetary policy depends on the economic conditions in the economy, including the level of economic activity, inflation expectations, and the state of financial markets. Third, monetary policy may not be effective in the face of other economic shocks, such as supply-side shocks that affect the economy's production capacity (Krogstrup & Oman, 2019; Omotor, 2007).
In conclusion, monetary policy is a crucial tool used by central banks to influence the economy's performance. Through its impact on the money supply, interest rates, and exchange rates, monetary policy can affect economic growth, employment, and price stability. However, the effectiveness of monetary policy is subject to several limitations, including the uncertain timing and magnitude of its impact, the state of the economy, and the presence of other economic shocks. Central banks must carefully consider these limitations when implementing monetary policy to achieve their macroeconomic objectives.
Friedman, B.M. (1988). Lessons on monetary policy from the 1980s. Journal of Economic Perspectives, 2(3), 51-72.
Goldberg, J.E., Klee, E., Prescott, E.S., & Wood, P.R. (2020). Monetary policy strategies and tools: Financial stability considerations.
Goodfriend, M. (2007). How the world achieved consensus on monetary policy. Journal of Economic Perspectives, 21(4), 47-68.
Goshit, G.G., & Landi, J.H. (2014). Monetary and fiscal policy interactions and limitations: The need for policy coordination for macroeconomic outcomes in Nigeria. LWATI: A Journal of Contemporary Research, 11(3), 56-72.
Krogstrup, S., & Oman, W. (2019). Macroeconomic and financial policies for climate change mitigation: A review of the literature.
Omotor, D.G. (2007). Monetary policy and economic growth: Theoretical and conceptual issues. Economic and Financial Review, 45(4), 3.
Received: 02-Jan-2023, Manuscript No. JIACS-23-13442; Editor assigned: 05-Jan-2023, PreQC No. JIACS-23-13442(PQ); Reviewed: 19-Jan-2023, QC No. JIACS-23-13442; Revised: 21-Jan-2023, Manuscript No. JIACS-23-13442(R); Published: 28-Jan-2023