Monetary Policy Tough Love: Should Essay

Open, View, and/or
Download this Document

Total Length: 2966 words ( 10 double-spaced pages)

Total Sources: 8

Page 1 of 10



While this represents a significant portion of the government's operating income, higher inflation would generate even more seigniorage by requiring larger volumes (or simply higher denominations) of currency in circulation. If prevailing annualized inflation rises above 4.6% but remains below 9.0%, real seigniorage could climb to $130 billion, or about 6% of all federal receipts in a year like 2009 (U.S. Financial Management Budget).

In itself, cash carries an interest rate of zero and no central bank can reduce its rate targets below that level. This is the pernicious "liquidity trap" that the Open Market Committee has sought to avoid by guiding U.S. overnight rates close to zero while avoiding a formal move to that level (Svensson). Obviously, once nominal rates have dropped to zero, no further easing is possible, requiring monetary authorities to employ a different set of policy instruments.

Many of these instruments are effective to the extent to which they are explicitly or implicitly inflationary. Although the Fed's recent "credit easing" campaign and open market operations were primarily aimed at soothing extremely risk-averse credit markets, they also generated substantial "quantitative easing" in the sense that they dramatically increased the money supply. This would ordinarily create long-term inflation, which in itself stimulates consumption and investment in the near-term. As a last resort, formally or informally devaluing of the dollar against other global currencies would erode its buying power (feeding inflation) and so reduce the real cost of servicing dollar-denominated debt.

Swedish central banker Lars Svensson argues convincingly that these inflationary policies, far from being harmful to the economy, help to stimulate healthy expansion.

Stuck Writing Your "Monetary Policy Tough Love: Should" Essay?

View All Our Example Monetary Policy Tough Love: Should Essay

Have A Custom Example Essay Written

An "inflationary psychology" supports behaviors and outcomes that deflationary environments do not. However, this psychology can only take root if consumers and investors believe that expanded money supply is relatively permanent:

A temporary targeted increase in the banks' reserves with the central bank would probably be completely ineffective. The problem here is, however, that there is no way for the central bank to make a credible commitment to a larger money supply in the future. There is nothing to prevent the central bank from reneging on such a commitment and reducing the money supply in the future in order to reduce future inflation and keep it in line with the inflation target (Svensson).

In an environment where qualitative easing has failed, accepting that inflation will be elevated in the future does not necessarily entail embracing the hyperinflationary forces that poisoned the U.S. economy in the 1970s or Europe in the 1920s. Instead, it is a form of tough -- and credible -- medicine for a fiscal system that is choking on its debts. As Rogoff puts it:

No one wants to relive the anti-inflation fights of the 1980s and 1990s. […] But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary ("Inflation" 1-2)......

Show More ⇣

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Monetary Policy Tough Love Should" (2010, March 31) Retrieved June 4, 2026, from
https://www.aceyourpaper.com/essays/monetary-policy-tough-love-1193

Latest MLA Format (8th edition)

Copy Reference
"Monetary Policy Tough Love Should" 31 March 2010. Web.4 June. 2026. <
https://www.aceyourpaper.com/essays/monetary-policy-tough-love-1193>

Latest Chicago Format (16th edition)

Copy Reference
"Monetary Policy Tough Love Should", 31 March 2010, Accessed.4 June. 2026,
https://www.aceyourpaper.com/essays/monetary-policy-tough-love-1193
   

Open, View, and/or
Download this Document
order custom essay example