Posts tagged: monetary

Central Bank Monetary Policy

After creation of first central bank in England in 1694, during the period between 1870 and 1920 saw the creation of central banks across the board worldwide and born existing major central banks today, as the U.S. Federal Reserve was created in 1913, led by the industrialization of Western countries and the use of gold standard.

The monetary policy of central banks teamed to maintain a fixed exchange rate of the currency gold national value and trading in a tight range against other currencies also gold supported. To accomplish this end, central banks began to establish the interest they would pay their own borrowers and those that would be charged to other banks who liquidity and resorting to central bank needed credit to ask those affecting interest rates and the exchange rate between currencies.

The gold standard maintenance adjustments needed interest rates practically every month. It was fully established Central Bank’s role as lender of last resort (for banks and institutions, not consumers) and it was demonstrating how interest rates are influenced the entire economy as a whole.

In the second half of the twentieth century, the most widespread monetary policy in developed countries focused on the growth of the supply and its effect on monetary macroeconomics. This was the main idea of monetarist economists, some of the most influential was Milton Friedman, Nobel Prize for Economics in 1976.

Friedman went on to state that the aggregate public debt contracted by governments during times of economic recession would be financed by the creation of the same amount of money to stimulate the economy. However, this type of policy objectives centered on money supply growth has been less satisfactory results repeatedly. For example, in 1979 the Federal Reserve of the United States focused on creating and outputting more money by increasing the supply of money available to stimulate economic growth, but it did not work. In practice there are complex relationships between money supply and other macroeconomic variables that make this impractical policy.