Monetary Policy Or Fallacy?

Monetary Policy

Every nation in the world today spends a vast amount of its resources in the form of time, policy expertise, research, and evaluator analysis, so as to have a clear outlook of its economy. The early century emperors and rulers spent great effort in fighting the war, but the focus has now shifted to creating sound economic policies to sustain economies in the long run and preventing economic failures. Across all major markets in the world today, the policy-making is becoming increasingly pre-occupied with economic welfare.

When it comes to economic policymaking, the responsibilities are largely discharged by the central bank, along with the monetary wings of the government. This process is, however, not free from exogenous influence as the foreign entities can or may influence the economic policies of a country. A good example would be the bailout package for Greece after the economic downturn that it experienced.

Every country has a central authority that may act as the final word in creating and formulating the economic policies for the concerned country– It could be a central bank (e.g. India, USA) or maybe a specialized agency for policy formulation (e.g. Australia, Macao). Whether it is a central bank or be it a specialized monetary agency, the outcome or the policy framework of any country is based on two broad sets of economic regulations — the monetary policy and the fiscal policy. Though the ends of both policies are same– achieving economic stability and prosperity– the means of achieving them are different.

Fiscal policy can be defined as the effective use of the financial resources at the government disposal for the effective management of the economy. When the government alters its levels of revenue collection (mainly through taxes) and its expenditures, this may, in turn, affect the patterns in the aggregate demand that prevails on the economy. In a way, the government is manipulating the economic conditions using the expenditure and revenue resources available to the government. The fiscal policy in India is largely influenced by the Ministry of Finance and Economic Affairs, and often this policy is implemented through government interventions and annual budgets, along with the white papers that the government releases periodically.

On the other hand, monetary policies use the instruments that are aimed at controlling the supply of the money in the economy in order to bring in more stability into the market. Monetary policies also help in achieving, indirectly, control over developmental and business activities due to the fact that virtually all transactions in an economy are tied with the supply of the money and the price levels.

The reason why the monetary policy emerges as the single most, widely discussed policy of our times is due to the influence that it wields on the economy as well as the markets. It is the most awaited policy announcement from the perspective of media every year and each time when the governor announces the interest rates along with other policy measures, a lot of media and public attention is garnered.

But can achieve what we aspire through the monetary policies and the periodic evaluations?

Many a times, the economy collapses and undergoes adverse structural shifts, amidst the policies created by the so called ‘expertise’ and professionalism. For instance, the American economy was considered to be supreme, above any form of crisis– one that fell like a house of cards when it was hit by the sub-prime crisis. Similar was the case with the Indian economy in the late 1980s. As the economy was largely closed, India’s policymakers staunchly believed that Indian markets would be free from any form of crisis or fiscal challenges. However, it was proved wrong in 1991, leaving India humiliated in front of the global community.

The argument essentially is not to do away with the monetary policy framework completely, but to include more and more stakeholders so that the ambit of the policy would be more comprehensive.

-Contributed by Jiss Palelil

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