Curiosity 8.4: How Big Is the Money Multiplier?

Curiosity 9.3: Should the Fed Be Independent?
Although not as independent as the Swiss National Bank or the Bundesbank of Germany, relative to most other central banks the Federal Reserve System is quite independent from political influence, mainly because its board members are appointed for long, nonrenewable terms and because it is financially independent. It does not have complete autonomy, however. Congress has the power to affect the Fed through legislation.
The strongest argument in favor of an independent Fed is that subjecting the Fed to political pressures would impart an inflationary bias to monetary policy as politicians use monetary policy to enhance their reelections. Indeed, in countries with relatively independent central banks, such as the United States and Germany, inflation is relatively low, whereas in countries with less independent central banks, such as Italy and Spain, inflation is much higher. A related argument is that an independent Fed can resist financing large government budget deficits, which would also lead to excessive inflation. Many believe that politicians do not have the ability to make hard decisions on issues of great economic importance, such as reducing the budget deficit or reforming the banking system. An independent Fed can pursue policies that are politically unpopular yet in the public interest.
Those opposed to Fed independence claim that it is undemocratic to allow important economic decisions to be made by an elite group responsible to no one. Further, effective policy requires coordination from all policymakers. With an independent Fed, fiscal policy may be undone by contrary monetary policy.
The independence issue will never be settled. Those who like the Fed's policies will support its independence, but those who do not like its policies will not.

ever measure of the motley supply is chosen for application of the monetarist rule, it will soon begin to misbehave. It will no longer bear a stable relationship with income or inflation. One suggestion for overcoming this drawback is to change the rule to target on a nominal GDP growth rate equal approximately to the historical real rate of growth of GDP. When nominal GDP grows faster than the chosen target rate, cut back on money-supply growth; when nominal GDP grows more slowly than the target rate, increase money-supply growth. Changes in velocity cause changes in nominal GDP, so they are automatically offset by this rule.
2. Lack of Fed control over money supply. Even if velocity were constant, the Fed could not maintain close enough control over the money supply to effect the monetarist rule. This lack of control arises from several sources: the public's holdings of currency fluctuate irregularly; banks and the public shift deposits from one measure of the money supply to another; financial innovations are continually rendering money measures obsolete; banks can choose to hold excess reserves; and banks can obtain extra reserves if needed by borrowing cheaply from the Fed. Unstable velocity and the lack of control over monetary aggregates have prompted suggestions that it is better to target monetary policy directly on the inflation rate, rather than on a monetary aggregate.

 



Macroeconomic Essentials. Understanding Economics in the News 2000
Macroeconomic Essentials - 2nd Edition: Understanding Economics in the News
ISBN: 0262611503
EAN: 2147483647
Year: 2004
Pages: 152

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