ECON 6644 - 02
“Monetary policy is directly responsible for economic and financial stability”
This article discusses how central banks around world play the top role at controlling the economy’s life. They should know and see everything in order to properly act on it in a timely manner. Without this and proper monetary policies, a financial crisis is bound to happen. In the last major financial crisis, the US and EU were very affected. Both these countries monetary policies and central banks failed at seeing the warning signs and acting on them.
There are three inflation indicators that have passed the desired range of 0-2% that help indicate price stability in the US. This includes the rice in consumer prices, personal consumption expenditure index, and rising unit labor costs. Therefore, this falls on the central banks to recognize these potential problems that could lead to inflation and use monetary policy tools to help mitigate it.
If the Federal Reserve is worried about increased inflation, then they would want to reduce the money supply. It could possibly raise reserve requirements, increase the discount rate, and sell bonds in the open market. This would help restrain the economy and decrease aggregate demand to help deter a large spike in inflation. This is similar for other countries around the world when they want to control inflation as well. It is up to the country's central banks to use their different montary policies to help control to flow of money.