However, numerous studies shown that such a monetary policy targeting better matches central bank lossesUnder a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate. Typically the duration that the interest rate target is kept constant will vary between months and years. But the delegation of monetary policy to an independent body rests on the premise that such effects are not first order. Following the collapse of Bretton Woods, nominal anchoring has grown in importance for monetary policy makers and inflation reduction. Should a central bank use one of these anchors to maintain a target inflation rate, they would have to forfeit using other policies. Using this equation, we can rearrange to see the following: This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency. In general, the central banks in many developing countries have poor records in managing monetary policy. The primary difficulty is that few developing countries have deep markets in government debt. Monetary policy is policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often as an attempt to reduce inflation or the interest rate to ensure price stability and general trust of the value and stability of the nation's currency. You can learn more about the standards we follow in producing accurate, unbiased content in our (1978) ‘The Mechanisms of Intervention in the Exchange Market’, DeGrauwe, P. (1975) ‘Interaction of Monetary Policies in a Group of European Countries’, Kouri, P. (1974) ‘International Capital Flows and Portfolio Equilibrium’, Kouri, P. (1975) ‘The Hypothesis of Offsetting Capital Flows: A Case Study of Germany’, Kouri, P., and Porter, M. (1974) ‘International Capital Flows and Portfolio Equilibrium’, McKinnon, R. I. Argy, V., and Hodjera, Z.
If a central bank announces a particular policy to put curbs on increasing inflation, the inflation may continue to remain high if common public have no or little trust in the authority. In the US this approach to monetary policy was discontinued with the selection of Central banks might choose to set a money supply growth target as a nominal anchor to keep prices stable in the long term. Independent Monetary Policy in a Very Open Economy -Challenges, Costs and Benefits – 1. But even with a seemingly independent central bank, a central bank whose hands are not tied to the anti-inflation policy might be deemed as not fully credible; in this case there is an advantage to be had by the central bank being in some way bound to follow through on its policy pronouncements, lending it credibility. Countries may decide to use a fixed exchange rate monetary regime in order to take advantage of price stability and control inflation. The First, research suggests only a weak reflection of exchange rate movements in import prices, lending credibility to the opposed theory of local currency pricing (LCP).Second, another specificity of international optimal monetary policy is the issue of strategic interactions and competitive devaluations, which is due to cross-border spillovers in quantities and prices.Third, open economies face policy trade-offs if asset market distortions prevent global efficient allocation. Following the collapse of Bretton Woods, nominal anchoring has grown in importance for monetary policy makers and inflation reduction. The correct option is (a) - A nation may not pursue an independent monetary policy. The Federal Reserve uses open market operations (OMO) to achieve the target federal funds rate it has set by purchasing or selling Treasury securities. Nominal variables used as anchors primarily include exchange rate targets, money supply targets, and inflation targets with interest rate policy.In practice, to implement any type of monetary policy the main tool used is modifying the amount of Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals. The institutional framework for the single monetary policy shields the ECB from all types of political influence. The latter regimes would have to implement an exchange rate target to influence their inflation, as none of the other instruments are available to them.