Is Monetary Policy Overburdened?
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Published: Mon, 09 Oct 2017
Many have suggested that monetary policy has solutions to numerous problems: achieving full employment, fiscal sustainability, and the preservation of financial stability (Orphanides 2013: 01). Regarding the primary role of monetary policy, this task seems too much for the policy, as most of the tasks do not fit in the realm in which monetary policy should operate. Primarily, the monetary policy is supposed to preserve and defend price stability (Orphanides 2013: 01). As well, policymakers that impose such tasks tend to overlook the role of the central banks in public policy. This paper explores the information presented by Orphanides Athanasius (2013) in his article Is Monetary Policy Overburdened?
The primary role of the monetary policy is to maintain price stability over time. The overburdening of such a policy would thus threaten the role of the central banks, which is to ensure price stability (Orphanides 2013, pp. 1). Orphanides is justified to make such claim. The same central banks that supply the medium of exchange can as well be responsible for its stability. Thus, a workable monetary policy came from the experiences, which included inflation and deflation (Orphanides 2013, pp. 3). The banks thus gained credibility as financial institutions after they placed price stability as a policy objective of the monetary policy. Thus, when the issue of monetary policy receives a political approach in its role, the banks will have to compromise on their role.
The infamous economic crisis of 2008 left in its wake a disarray characterized by a disappointing economic growth in the countries that suffered from the downturn (Orphanides 2013, pp. 3). In the wake of the economic recession, the monetary policy should take effect, majorly with reference to price stability and economic stability. Thus, the role of the central bank to avert the great depression was largely unsuccessful. This is because six years after the downturn, GDPs of countries such as the US and the UK have never come even close to the previous prosperous era leading up to the crisis (Orphanides 2013, pp. 4).
Lack of growth has far-reaching effects on the money markets. It first starts with the issue of employment. Employment growth has been insufficient to the extent that employment at tolerable rates is limited (Orphanides 2013, pp. 5). Some countries have lost in the making of the young generation. Secondly, government revenues are much lower than they ought to be, coupled with conditions of excessive government debt (Orphanides 2013, pp. 5). The balance sheets in the private sectors have remained weak and banks are becoming increasingly vulnerable to write-downs of legacy assets.
In view of the issue of full employment as one of the tasks of the monetary policy, there is adequate evidence that the crisis has left most countries, including the US, Japan, and the UK with an alarming rate of unemployment (Orphanides 2013, pp. 6). In the USA, the unemployment rate has remained above what is compatible with price stability. In Japan for instance, according to Orphanides (2013, pp. 7), the unemployment rate has dropped significantly, but is still below what is expected. In the UK, there has been a remarkable improvement. This implies that a good number of monetary policies have proved ineffective (Orphanides 2013, pp. 7).
As much as monetary policy can influence employment, some policy interventions ought to be considered effective (Orphanides 2013, pp. 08). Such policies include fiscal policy for incentives on job creation and investment, and the structural and labor policies that enhance flexibility and inefficiency of labor markets. This is because the fiscal policy cannot solve the underlying problems such as rigidity in the labor markets. According to Orphanides (2013, pp.10), monetary policy would contribute to full employment if it focused on price stability. If central banks were to handle the issue of employment, economies would suffer significantly.
Fiscal stability is another area where overburdening of the monetary policy is evident. The challenge is evident in the advanced economies, including Japan and the UK, which continue to operate their GDPs in staggering debts (Orphanides 2013, pp. 11). Such challenges call for the central bank to step in and solve the issue of sovereign debt sustainability. The monetary policy would be significantly overburdened thus creating unpleasant intertemporal political implications (Orphanides 2013, pp. 11).
Assigning monetary policy as well the role of maintaining financial stability is overburdening. Monetary policy has both fiscal and distributional consequences, which may be relatively smaller than the macroeconomic consequences of monetary policy actions on economic growth and price developments (Orphanides 2013, pp. 13). If there were no suitably defined fiscal backstop, the clean-up process would lead to recapitalizing banks (Orphanides 2013, pp. 15). In view of this, the author argues that the credibility of the central bank questionable.
Conclusively, bringing in the central bank and the monetary policy to bridge gaps where other policies have failed forces the central bank to operate under the realms of politics. Thus, the monetary policy should concentrate on its primary role of ensuring price stability.
Appraisal of the Article
The article has clear subsections that help the reader to understand. Orphanides (2013) employs the traditional structure of an introduction, body, and conclusion. This similarly happens to the many well-organized paragraphs that have clear topic sentences.
Orphanides (2013) brings out a straightforward abstract that adequately summarizes the main issues of the paper. One good aspect that the author highlights to attract the attention of the reader is the fact that some of the roles assigned to the monetary policy are overburdening (Orphanides 2013). The purpose of the paper thus comes out clearly from the abstract as that which is to examine the public policies that overburden monetary policy. The abstract also outlines the dire consequences of overburdening the monetary policy.
The author outlines his introduction from a broad perspective, which makes it understandable to the ordinary reader. The background to the topic clearly mentions the role of the central bank as well as the primary role of the monetary policy (Orphanides 2013, pp. 1). Arguably, Orphanides (2013) brings out the role of the central banks by outlining the pivotal role the monetary policy plays in the economy of a country. This is crucial to the understanding of the point of view the author takes in this paper.
His introduction gives an overview of the entire article by giving adequate details on the prevailing public policies that overburden the monetary policy (Orphanides 2013, pp.1).The paragraphing is sequential and logical with a language easy to understand.
The author brings out the ideas of the paper in a clear subdivision of the paper into different sections. In addressing the issues that give burdens to the monetary policy, Orphanides gives every issue its own section. Every issue has explicit examples that give much weight to the arguments he presents.
In the first section, the author addresses the issue of slow economic recovery following the economic downturn. He gives detailed examples of countries that have taken time to recover. The information is vital given the fact that these countries control the economy of other countries. One good aspect of this section is easy readability. The author brings out a conclusion at the end of this section in a manner that readers of the article would comprehend what he is attempting to pass.
The position taken by Orphanides in his article gives him credit especially in view of how he defends the role of monetary policy. He states that adding monetary policy should only focus on its primary role and thus be able to perform its function effectively. On the weaker side, the author argues that other policies should take the extra roles that policies ought to assume the roles that overburden the monetary policy. This does not come out well as he does not go into details to explain how such public policies would cater for the issues in question such that a long lasting solution is realized.
To give the article a sense of credibility, the author ought to have given clear recommendations on how other public policies would bring about economic stability without involving monetary policy. As well, it would not be reasonable to argue that monetary policy should only stick to its primary role even if the central bank can execute similar functions. In a different perspective, giving the monetary policy the three extra roles to play would be overburdening but not one of the roles. The author ought to have explained to the readers whether assigning monetary policy one of the functions would still overburden it. Given that the three roles are independent of each other, they can be executed by different policies.
The author also brings out clearly the concept of referencing to the right standards. The in-text citations have been correctly written in every paragraph. This further assures the reader that the information is from trusted and credible sources thus should not be doubted. The reference list is complete, with very authoritative sources being used in the text. Arguably, the use of recent sources ranging between 2002 to the year 2014 makes the article and information presented therein credible. The author has also impressively included an appendix to show the graphs and tables hat were referred to in the body of the text.
The author gives a lengthy and summative conclusion. It is long enough to bring out the summary of issues addressed in the article. The author begins with a generalized point of view that overburdening monetary policy should not take place in the event that the other economic policies fail. The author then highlights the dangers involved in assigning the monetary policy more responsibilities. He does this in a very systematic to enable his readers draw conclusion. One would argue that the author is unbiased in his argument and the information he brings forth is insightful and detailed.
Orphanides, Athanasius. 2013. Is Monetary Policy Overburdened? Public Policy Discussion
Paper No. 13-8, [Online] Available at: <http://www.federalreserve.gov/pubs/feds/1998/199803/199803pap.pdf>. [Accessed 25 March 2014].
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