Course work in macroeconomics

CHAPTER 2: National monetary policies in developed economies

         Monetary policy has become an important instrumental sphere in many countries of the world, both in developed economies and in countries of catch-up development. It plays the most important role in regions such as Central and Eastern Europe and the Commonwealth of Independent States. It seems that in the initial period of transition from a "socialist" command economy to a market economy, the implementation of effective anti-inflation regulation is the most important task. As the practice of the functioning of the European Union shows, since 1975 to date, the monetary policy strategy has proven to be effective in achieving the goal of ensuring overall price stability in the EU.

         The leading European central banks, justifying the allocation of the goal of price stability as a priority, proceeded from the fact that its maintenance will lay a solid foundation for improving macroeconomic indicators and raising living standards in the EU countries for the following reasons.

         First, price stability makes it easier to track changes in relative prices of goods and services, since they are no longer obscured by fluctuations in the overall price level. As a result, enterprises and citizens receive clear, undistorted information about consumer and investment sentiment in the market, which allows more efficient allocation of free resources. Thus, price stability contributes to the growth of the economic potential of the EU.

         Secondly, low inflation allows investors to reduce the size of the premium for inflation risk, included in the interest rate level in order to compensate for possible losses associated with their long-term assets. This increases the efficiency of the allocation of funds in the capital market.

         Thirdly, in conditions of price stability, enterprises and the population are less inclined to divert resources from the productive sphere.

         Fourth, maintaining low inflation helps to prevent essentially the forced redistribution of welfare and income.

         At the same time, the most popular instruments of monetary policy were the restriction of money supply, regulation of the nominal exchange rate and inflation targeting. In the first case, the central bank regulates monetary or credit aggregates, in the second - the nominal exchange rate of the national currency acts as an intermediate goal of the monetary sphere, in the third - specific tasks are set to reduce inflation. Other monetary policy options, such as achieving a certain nominal national income or real exchange rate, have received little use.