Question

Explain how central banks can produce monetary easing effects. Discuss the Bank of Japan’s current strategy to attain the price stability target. Also explain current debates among economists on recent monetary policies.

Answer 1

Central Banks have 3 main Primary Monetary easing effects.

1. Open market operations
2. Discount rate
3. Reserve requirement

Central banks toots work by inreasing or decreasing total liquidity. Its tools affect the money supply namely M1 and M2. M1 denotes currency and deposits M2 denotes money market conditions.

• OPEN MARKET CONDITIONS- Central banks buys securities and add them to its cash deposits and bank reserves. This available cash in central banks gives them chance to lend monry to others. Central bank shows entry in balance sheet and reduces cash holdings after selling securities.
• RESERVE REQUIREMENT - A low reserve requirement allows banks to lend more of their deposits. It's expansionary because it creates credit. Central banks are more likely to adjust the targeted lending rate. Sometimes if central bank suffers cash liquidity problem it asks money from others banks as well.
• DISCOUNT RATE - The rate at which central banks charges its members at discount rate. Central banks have to follow this rate if they face problem while borrowing money from other banks.

BANK OF JAPAN CURRENT STRATEGY TO ATTAIN PRICE STABILITY TARGET

The ultimate aim of banks of japan is to maintain price stability while determing the monetary policy. Price stability is very important as it show the real of the an economy. The central banks have set the amount of daily money market operations and chooses types of operational instruments, and provides and absorbs funds in the market.

• PRICE STABILITY TARGET OF 2 PERCENT-When prices fluctuate, it becomes very difficult to make decisions regarding investments and consumption specially for individuals and firms, and this can effect the efficient allocation of resources in the economy. Unstable prices can also distort income distribution. Therfore Banks of japan has set the "price stability target" at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) .
• MONETARY POLICY AND MONEY MARKET OPERATIONS- Banks of japan uses its sources and research to find on what basis should monetary policy should be drafted. MPMs are held eight times a year, each time for two days. At the Monetary policy and money market the Policy Board members discuss and decide the guideline for monetary market operations.

CURRENT DEBATES AMONG ECONOMISTS ON RECENT MONETARY POLICY

• RISING INFLATIONS AND DEFICITS AS A PROBLEM - Current monetary policies in the U.S. and the European Union have the two economic systems severely affected by the last financial crisis. Explosive policy mix is raising concerns about accelerating price inflation.
• CURRENT POLICY - Core inflation has not fallen as much as many feared at the beginning of the crisis and is only slightly below the Fedral target. The short-term real interest rate has remained significantly negative for many years, much longer than in any recession in the past several decade.