The Choice of Monetary Policy and Its Relevance for Economic Performance: Empirical Evidence from a Global Perspective

By Doroftei, Irina Madalina; Paun, Cristian | Romanian Journal of Political Science, Summer 2013 | Go to article overview

The Choice of Monetary Policy and Its Relevance for Economic Performance: Empirical Evidence from a Global Perspective


Doroftei, Irina Madalina, Paun, Cristian, Romanian Journal of Political Science


Introduction

One would think that in our modern society in which central banks are taken for granted as institutions operating the monetary policy of a country (and capable of generating miracles during financial crises) economists have reached a consensus on several issues. What is certain is that today central banking means that a governmental authority (somewhat independent of the political influences of the government, but sometimes part of the government and Ministry of Finance) is in charge of discretionary monetary management, creating and controlling (or at least trying to control) the money supply in a certain country/region, holding monopoly over such activity, managing the country's international reserves, and regulating the banking system. This implies a couple of functions such as lender of last resort for the banking system, the bankers' bank and the imposition of certain requirements on the system. After many severe financial crises, central banks have assumed not only the purpose of achieving price stability, but also that of achieving financial stability. Yet, other fundamental enquiries deserve our attention. For example, what is money and how does it influence the overall economy? What impact on the economy does monetary policy have and how should central banks exercise it? Does money have a role in the conduct of monetary policy? Surprisingly, there is considerable disagreement over the answers to the questions above, from both academic and professional point of views.

The 20th century debate focuses on the neutrality of money: does increasing the money stock impact real variables such as real interest rates, employment or output? Nowadays, most economists (including monetarists and Keynesians, but not real-business cycle proponents who assume neutrality) agree that there is a short-term effect of monetary changes over output, but that in the long run, money is neutral (Brunner and Meltzer, 1993). Still, Austrian economist Mises (1912) demonstrated that money will have an impact on relative prices and incomes in the end, changing even the structure of production in the economy. The so-called modern literature begins with Tobin's 1965 article "Money and economic growth", published in Econometrica. In a fiat money system, Tobin's portfolio shift would mean that if non-interest-bearing money is considered to be an asset, then people can be induced to "shift" their savings in more productive forms--i.e. real capital. The result of his "descriptive" model is that faster money growth (and, thus, faster inflation) will increase the capital stock and output per person (Orphanides and Solow, 1990), though not the rate of real growth, as noted by the two authors. The debate is not over yet: many empirical studies have tried tackling the neutrality issue with inconclusive results, assessing whether monetary policy influences macroeconomic performance.

The 19th century debate introduced the idea of one monetary authority "producing" money, thus institutionalizing the concept of central bank, while Walter Bagehot (1826-1877) described the 'lender of last resort' role that the Bank of England should have--i.e. helping banks in distress, lending them liquidity in order to avoid disaster in the whole banking system--institutionalizing the prototype of the modern central bank. The free-banking option was left out of the equation for good. Thus, today, monetary policy represents the sum of actions and activities undertaken by a central bank--using instruments such as interest rates, reserves, base money creation etc.--with the purpose of achieving its objectives (for example, maintaining price stability). The statutory objectives are usually set through different Acts governing the central bank (Treaty on the Functioning of the European Union, Article 127 (1) in the case of the European Central Bank (ECB), the Federal Reserve Act established by the Congress in the USA etc.). Sometimes these objectives are vaguely mentioned, or cover a wide range of issues, which leaves to the central bankers to decide on the priorities of the moment (Eijffinger and de Haan, 1996).

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Choice of Monetary Policy and Its Relevance for Economic Performance: Empirical Evidence from a Global Perspective
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.