Forex Blog: Currency Trading News & Analysis.

April 26th 2005

Is Monetary Policy still relevant?

With economies becoming more market oriented, and markets, themselves becoming more globalized, some investors have begun to question the relevance of monetary policy. The purpose of a central bank is to control interest rates and often the exchange rate vis-a-vis the money supply. However, economic liberalization and globalization have severely constrained central banks ability to achieve this task. In a command or highly regulated economy, the central bank can control the money supply by limiting capital mobility. In an open economy, investors are essentially free to invest there money where they see fit. Moreover, interest rates and exchange rates are no longer determined exclusively by central banks, which serve as mere guides. Rather, the rates are determined by market forces, and investor expectations and interest rate parity are the preeminent influences.

Bl Pandit, an Indian economist defends monetary policy as an effective economic tool. It is especially important in developing economies, he argues, where destabilizing shocks must be predicted and neutralized, and where inflation is a perennial problem.  India’s Financial Press reports:

The multiple indicators for monetary policy have to incorporate signals not only from the real sector but also from debt, equity, credit and currency markets—both domestic and foreign. This makes the practice of monetary policy more demanding.

Read More: Has the Monetary Policy Lost its relevance?

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Posted by Adam Kritzer | in Central Banks | No Comments »

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