Limits of Monetary Policy in Practice and Theory

This journal seeks to understand the differences that exist between monetary policies in theory and practical world by identifying the various limitations that have been put across by economists concerning monetary policies. Monetary policies are public intervention measures that aim at influencing the pattern and level of economic activity in a given country. Monetary policies are crucial as they promote attainment of desired national goals.

The views that moderate changes in monetary policy always have a number of impacts on national economies and seem to be inconsistent with the policy in theory and practice. The logic used is that spending always depends on long terms spending decisions and short-term interest rates have no impact on the consumption values. This study will investigate the conflicts that exist between various objectives of monetary policies.

There tend to many limitations that exist between the theoretical aspect of monetary policies and the usage of monetary policy in the real world of solving carious macroeconomic problems, such as achieving full employment, price stability and economic growth. In the practical world these goals tend to collide making the theoretical aspect more conflicting with the practical usage of the monetary policies.

Data Used

The study will involve taking into consideration responses from the asset markets to various changes in interest rates in the short run introduced by Fed to solve various macroeconomic problems that have faced the American economy since its formation in 1914. The study will go a further step to prove that in the recent past the policy of short-term interest rate has had no systematic relationship with long-term changes in the interest rates. It will rely heavily on data collected from asset markets and Fed on the impact of changes in interest rate as a monetary policy measure, both in the short run and in the long run.

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The data used for in the journal was collected from both secondary and primary sources. The secondary source of our data used for analysis was collected from the past studies conducted by various economic scholars on the issue of limits of monetary policy in practice and theory. The data come from past case studies on the subject of monetary policy and their application in solving economic problems.

Observation was used as a main source of primary data where we observed the implication of various changes in interest rates introduced by Fed to manage economic problems. We observed the impact of short-term changes in the interest rates and their effectiveness in solving economic problems.

Outcomes of the Study

They observed in their study that they lacked an association between the policy and crucial financial markets. The data that they collected indicated that the first quarter of the century interest rates had a tendency of moving closely together. They also noted that global savings had an impact on interest rates whereby they contributed to keeping long-term interest rates at lower levels than they would have been if global savings were absent in the economy. They noted that the short-term and long-term interest rates influenced other economic variables such as prices of commodities such as houses. The interests had a direct impact on the financial markets instruments such as bonds and shares.

From the study it comes out clearly that effectiveness of interest rate as monetary policy to bring price stability in the economy is affected by other factors that influence the impact that the policy has in the economy in the long run. Global factors such as global savings influence the price of key financial assets in the economy making the interest rates ineffective in reducing inflation in the economy (Carmen & Vincent, 2001).

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Criticism of the Study

The study’s strongest aspect is the focusing on specific sector of the economy. The author focused on the effect of changes introduced by Fed on various financial assets. This plays a crucial role in determining the impact of both short and long-term interests in the economy. The author was able to figure out whether the interest rates’ changes achieved their intended objectives or they failed. This helps in identification of those factors that could have contributed to failure of the monetary policy in question to achieve the intended goal.

The study focused mainly on one monetary policy instrument rather than combining at least two instruments to show their effectiveness in practice. The authors relied heavily on interest rates in their study and this provides room for criticism of the findings and conclusions that they draw from the study. They also focused on only one goal of monetary policy of achieving price stability in the economy. The authors failed to address the issue of limits of monetary policy in practice and theory by focusing too much on one aspect of economy. The conclusions from the study, therefore, do not justify monetary policy, being learnt in class, but failing to be effective when put into practice.

I believe the authors did not adequately address the question of the study. They failed terribly to take into consideration the effectiveness of other monetary instruments used by Fed to solve macroeconomic problems such as open market operations or selective credit control. The other instruments may be effective in their objectives; however, relying on one instrument to draw conclusions is questionable.

The issue that is not adequately addressed by the study is the effectiveness of other monetary instruments in managing various economic problems such as inflation or unemployment.

The authors should have used two monetary instruments to investigate their effectiveness when applied in real economic world to manage economic goals. They should also have incorporated other monetary policy goals, such as their effectiveness in achievement of full employment in the economy. They should have used the study to question the appropriateness of the monetary policy in achievement of the goals that are learnt in class. Through this incorporation, they would have managed to identify how the goals conflict with each other.

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