The paper "Indian Monetary Policy and Eurozone Crisis " is a great example of a finance and accounting case study. The subject matter of this paper is the definition of monetary policy and the 2011/2012 direction of the policy in India. To be explicit in addressing this subject, it is necessary to start by defining monetary policy then proceed to reflect on the historical and modern concept of monetary policy. This will be succeeded by a discussion on the effectiveness of monetary and instruments used in the operation of monetary policy. Following this part is an integral discussion on 2011/2010 direction of monetary policy in India. Monetary policy is a tool deployed by national Government to influence the operation of the economy.
The mechanism takes the form of controlling money supply and demand to meet economic and political objectives. Often, the goal of monetary policy is to realise macroeconomic stability i. e. achieve low inflation and other macroeconomic objectives. In the United States, the Federal Reserve Bank administers the monetary policy. Governments during early economies controlled money supply by minting precious metals with a government stamp.
The worth of currency was directly proportional to underlying precious metal. In the same vein, the country’ s worth was weighed by looking at gold and silver in the national treasury. Even though monarchs and despots tried to make more coins by filling with other substances, those who depended on currency worth, discovered this activity. Paper money was invented in the industrial revolution consequently making it easy for countries to change the amount of money in circulation. As a substitute for gold and silver, countries only needed paper, ink, and printing press to produce more banknotes.
Since people cast doubt on paper money, it was necessary to back it by a promise to pay on demand. In this case, a holder of pound sterling note could demand a pound of silver. In later years, gold standard came into being following the use of gold to back the promise to pay. The problem with this system was that nation’ s wealth depended on availability to gold and silver thus a deficiency of these metals made the nation’ s currency worthless. The modern concept of central banking can be traced back to the period of the great depression in 1930.
This was a time when governments in addition to Keynes thoughts, realised that amount of money in circulation played a role in the depression. This marked the beginning of active government involvement in influencing money supply through monetary policy. It was during this period that nations saw the need for central banks to control the money supply by establishing monetary authority. Central banks were therefore created to influence actively money supply instead of just accepting what happens to it.
As a result, the process of controlling the money supply would eventually influence credit creation, interest rates, and economic activity. The year 1968 saw the United States move away from the “ gold standard” system to a system where Federal Reserve controls the money supply and credit in the economy. This modern mechanism of money supply and demand goes a long way in maintaining the purchasing power of US Dollars against other leading world currencies. Over time, economists have been debating over the implementation and effectiveness of the monetary policy.
Countries, which print money to meet government expenditure usually, have a rapidly expanding money supply that devalues the country’ s currency. The devalued currency also means that the currency is worthless as compared to the value of goods and services it can buy. In the end, the hyperinflation of 30-40% monthly rates is registered. Conversely, tight monetary policy was effectively deployed by Germany during their hyperinflation in the Weimar Republic. This country succeeded in maintaining a low inflation rate. Besides, the monetary breaks of the 1980s applied by U. S.
Federal Reserve Chairman Paul Volcker were accompanied by an economic downturn in addition to deteriorating inflation rates. Bank of Canada, with its goal of 0-3% inflation rate in the 1990s, reduced their economic activity such that inflation rate assumed a negative figure for the first time since 1930s. These figures demonstrate how central banks have been influencing economic activity by regulating money in circulation and credit availability.
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