Course work in macroeconomics

1.3 Efficiency and Monetary Policy Models

         Most economists believe that monetary policy in the short term can affect the level of total income and employment, i.e. she is effective. However, there are still different points of view regarding the degree of its influence on the economy. It is generally recognized that monetary policy has certain advantages and, above all, a relatively short time lag - a period of time between a change in the economic situation (the moment of economic shock) and the adoption of monetary policy responses. Decisions are made by the central bank of the country, which does not require lengthy approvals. The necessary steps are carried out almost immediately by conducting operations on the open market.

         Monetary policy is flexible. By controlling intermediate and tactical goals, the central bank has the ability to quickly determine the correctness of the chosen direction of regulation, to adjust its policies, without waiting for its final results. This is explained by the direct influence of monetary regulation instruments on intermediate and tactical goals, which allows achieving the final goals.

         It should also be borne in mind that the central bank in countries with market economies is more independent than most government agencies, which allows it to pursue a firm exchange rate policy. He clearly adheres to the established parameters, without violating them when changing the current economic situation. Experience shows that a firm policy reduces the impact of political business cycles on the dynamics of employment levels, inflation, and GDP growth rates.

         Monetary policy is able to influence the structure of aggregate demand, the ratio of consumption, investment and public procurement in the total volume of aggregate demand, which is a policy of "cheap and expensive" money.

         However, the implementation of monetary policy raises a number of problems. One of them is that in practice it is difficult for the central bank to exercise control over the money supply for a number of reasons:

a) it is impossible to accurately calculate the value of the money multiplier, which can lead to unpredictable consequences for the money supply. For example, With bank issuance, situations of large growth in the money supply may arise in comparison with its initial increase (initial issue).

         For example, the central bank buys 10 thousand rubles. securities and, paying their seller, issues money (banknotes) for this amount. The seller can put the received money into his account in a commercial bank, which, in connection with the increase in its assets, in turn, can issue loans for 10 thousand rubles, thereby realizing a new credit issue and increasing the money supply. The subsequent stages of the movement of money and their corresponding increase are also possible;

b) the central bank, if necessary, can always increase the monetary base by lending to commercial banks and thereby change the money supply. Money control is especially complicated during inflation. An increase in its pace is accompanied, as a rule, by a rapid and uneven increase in the velocity of money, which reduces the effectiveness of anti-inflationary policies aimed at reducing it.

         The policy of controlling the money supply can lead to significant fluctuations in the interest rate, which will negatively affect the investment climate and may even lead to a reduction in long-term investments. The problem is exacerbated if the demand for money is inelastic with respect to the interest rate. In this situation, even a slight change in it will lead to serious fluctuations in the interest rate.

         Certain problems may arise during operations on the open market. Their large-scale use is sometimes accompanied by certain negative consequences. For example, if the central bank wants to sell a large package of government securities while pursuing a tight monetary policy, it will most likely have to sharply increase the interest rate on bonds in order to find buyers. Potential buyers know that when pursuing a policy of "expensive money" the interest rate level increases and therefore will require an increase in their profitability. High interest rates will lead to an increase in the state budget deficit, a reduction in private investment, attract foreign capital to the country, which will lead to an increase in the national currency and adversely affect exports. In countries with limited financial resources, selling a significant stake in government securities can divert capital from the real economy.

The effectiveness of monetary policy also reduces the presence of a multi-stage transmission mechanism. The overall result of the effect of changes in the money supply on the level of total income depends on how accurately each link in the transmission mechanism works. “Failure” at one stage can lead to unpredictable consequences. Particularly unreliable, according to some economists, is the relationship between interest rates and investments. In addition to the real loan interest rate, the amount of investment determines a number of other factors, the influence of which may turn out to be prevailing. For example, the need to introduce new technologies, expectations of high profits can stimulate entrepreneurs to increase investments even during the period of the central bank's policy of “expensive money”. On the contrary, a significant decline in production may inhibit the investment process even in the face of a decrease in the interest rate, i.e. in pursuing a "cheap money" policy.

         For the reasons discussed above, in order to develop a monetary policy and evaluate its consequences, the central bank needs comprehensive information about the factors affecting each of the stages of the transfer mechanism and their relationship. Obtaining such information in full is almost impossible, which in turn can lead to unpredictable end results.