Monetary Policy
Goals of monetary policy are to "promote maximum employment, inflation (stabilizing prices), and economic growth." If economists believe it's possible to achieve all the goals at once, the goals are inconsistent. There are limitations to monetary policy. The term "maximum employment" means that we should try to hold the unemployment rate as low as possible without pushing it below what economists call the natural rate or the full- employment rate. Pushing unemployment below that level would cause inflation to rise and thereby ruin the other objective--stable prices, economic growth, which is our objectives in the long run. Overall financial stability will lead to a better balance between consumption and saving that will make resources available for investment purposes, reduce changes in the economy created by the inflation in the past, and by the reactions of savers, as well as fostering high and sustainable economic growth; and contribute towards an investor friendly environm!ent that will attract foreign investors to the country. Evidence has suggested that economies perform better, in terms of growth, employment and living standards, in low inflation environments than they do when inflation is persistently high. This evidence
is a comparison across countries over long periods. The association between economic performance, measured by growth of output or growth of productivity, and inflation. This indicates a negative relation; that is, the higher the inflation, the lower the rate of real growth. Evidence suggesting that low inflation promotes growth has motivated recent decisions by a number of central banks and governments, most notably New Zealand. Canada, the United Kingdom and Sweden also have moved in recent years to establish monetary policy with official low inflation targets. Decisions to adopt a policy objective of low inflation suggest that other policy-makers are reading the evidence pertaining to inflation and growth as we are. Consis! and stable prices are inconsistent is shaped by the widely accepted "natural rate hypothesis." It argues that monetary policy has no effect on the economy's unemployment rate, which is often called the natural rate of unemployment. The reason is that, in the long run, unemployment depends on so-called "real" factors--such as technology and people's preferences for saving, risk, and work effort; these factors are beyond the reach of monetary policy. Most current estimates place the natural rate of unemployment in the range of 5¾-6¾%. Consistent attempts to expand the economy beyond its potent
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