Power of the Federal Reserve in Monetary Policy   Term Paper ID:27961 Click to get this paper

Essay Subject: Discusses the roles & functions of the Federal Reserve in formulating the nation's monetary policy.... More...

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Paper Abstract: Discusses the roles & functions of the Federal Reserve in formulating the nation's monetary policy. Paper Introduction: In order to discuss how monetary policy should be conducted in the U.S. it is first necessary to briefly summarize the unique power of the Federal Reserve and policy prescriptions suggested by alternative schools of thought. The foundation of the power of the Federal Reserve comes from its unique role in controlling the nation's supply of "base money;" the sum total of the currency in the hands of the public and the reserves that banks are legally required to hold to bank their deposits. Banks can withdraw their reserves in the form of cash, or deposit cash with the Fed to add to their reserves. But the total quantity of base money cannot be changed except by the Fed's action. (Woolley, 1984) By injection or withdrawing base money from the system the Fed has immense influence over the economy. If the Fed puts more cash in - which it usually does by buying U.S. government debt Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The result is the Fed's injection of base moneysupposedly has a multiplier effect, expanding credit throughout theeconomy. If the Fed puts more cash in - whichit usually does by buying U.S. New York: Harcourt, Brace Javanovich. (1981). In order to discuss how monetary policy should be conducted in theU.S. My prescription is hostile to the opposite wings of conventionaleconomic thought, Keynesian and monetarist, and is single-mindedly devotedto the ideas of the classical gold standard. Monetary policy, the federal reserve system and gold. (1992, December-November). The result was that the Federal Reserve cast offits monetarist hat and returned to an active, discretionary policy. But by the summer of 1982 after a severe recessionin which U.S. F. Ironically, at a time when "nolimits" appears to be the message economically, culturally and socially inthe U.S., the return to a conservative gold standard for the FederalReserve would indeed be a revolutionary innovation. It is true that a gold standard orthodoxy for the Federal Reserve,although elegant, might be severe on occasion and probably not in tune withdemocratic impulses. Studies in business cycle theory. Morgan Stanley.Roberts, P. The rise in credit and the fall in interest rates in turn,stimulates the economy through a variety of channels: housing starts rise,the dollar falls (stimulating exports), business investment rises, consumercredit gets easier. Free to Choose. It seems to me that the definitive rupture of thegold-backed monetary system in 1971 can be closely related to the priceinflation of the next 1 years. ReferencesClifford, A. For thecentury preceding World War I, prices and interest rates had beenremarkably stable. Andeven today gold-price calculations still dominate large segments of theglobal trading system. Furthermore, most of the money they lend out ends up beingdeposited back in the banking system, allowing a second wave of lending, athird and so on. There had been peaks and valleys, of course, but thefinancial discombobulation of the 197 s was unprecedented in modernAmerican history. Cambridge, MA: Cambridge University Press.Friedman, M. But it seems to me that central banking, federalsubsidies, paper money, and deposit insurance have all fallen short of theclaims of their respective promoters. J. Fordham University Press.Friedman, M. The independence of the Federal Reserve system. Thus I would argue that, particularly during the 197 s, gold was farfrom the sideshow that the Federal Reserve pretended it was. Monetary politics: The Federal Reserve and the politics of monetary policy. 4-19Woolley, J. A truly sound monetary policy wouldonly come by tying money to an objective outside standard such as gold.Under a gold standard the monetary base would essentially be fixed (WallStreet Journal editorial pages). Tie the Fed's hands with monetarytargets or with a gold standard - and what will automatically follow arestable prices and a minimal chance of recession (Lucas, 1981). (1965). What's wrong with the economy. (1959). government debt from a select group ofcommercial banks. Pennsylvania: University of Pennsylvania Press.Lucas, R. The Fed roller coaster is moving down. I would raise the issue of whether it ispure coincident that the great inflation of the 197 s had followed theabrogation of the gold-exchange standard culminating in 1971? They can then choose (although theydon't have to) to lend out the excess, expanding credit and driving downinterest rates. Banks canwithdraw their reserves in the form of cash, or deposit cash with the Fedto add to their reserves. But the total quantity of base money cannot bechanged except by the Fed's action. Since the 195 s,so-called monetarist, led by the University of Chicago's Milton Friedman,have persistently argued that the Federal Reserve, instead of makingmonetary policy, should follow a simple monetary rule. This policy option would again take much of thediscretionary power of the Fed away and transfer it to the controllers offiscal policy. E. it is first necessary to briefly summarize the unique power of theFederal Reserve and policy prescriptions suggested by alternative schoolsof thought. This argument has become particularly prominent in thepast few years as the American economy has suffered through a recession(Sinai, 1992). Taken this brief description of what the Federal Reserve "does" thequestion then becomes how should the Fed use this power? Cambridge, MA: MIT Press.Lehman, L. The foundation of the power of the Federal Reserve comes fromits unique role in controlling the nation's supply of "base money;" the sumtotal of the currency in the hands of the public and the reserves thatbanks are legally required to hold to bank their deposits. It seems that both the monetarists and the gold standardschools of thought draw much of their intellectual justification for thedoctrine of rational expectations. Either a full adoption of monetarism or a revival of the goldstandard would take away much of the independence of the Federal Reserveand shift its function from the making of economic policy to narrowtechnical issues. The essence of thatrule is that discretionary policy on the part of the Fed actually makes theeconomy less stable. In October of 1979Paul Volcker said that the Federal Reserve would target monetary aggregatesas its chief priority. In a general sense this doctrine seemsto hold not only that inflation feeds on itself via expectations of futureinflation, but that inflation can be cured quickly and with little pain ifthe commitment of the monetary authorities not to accommodating inflationcould be made credible to the public. These banks then find themselves with more reserves thanthey are legally required to hold. Challenge, pp. (198 ). Further to the left, both Keynesians and Post-Keynesians have arguedthat fiscal variables can be used to stabilize the economy and monetarypolicy should fall in line with whatever appropriate fiscal measures aredictated and by the Congressional and Executive branches. Program for monetary stability. T. It was atcenter stage, and the run-up in its price proved irrefutably that theFederal Reserve, during this period of time was not stringent enough Looking at the period from 1979 until 1982 it appeared that theFederal Reserve had adopted a monetarist perspective. C. My policy prescription for the Federal Reserve follows from thedictates of the gold standard. Consequently, the world must return to gold and the Federal Reservemust stop its frenetic buying and selling of government securities andthrow in the towel on trying to control the nations money supply, which itoften seems to have trouble even counting.My call for the remonitiztion of gold is valid because gold never has lostits monetary properties. Wall Street Journal.Sinai, A. I would maintain that theworld's monetary system has been going downhill since 1914, regressing fromthe international gold standard to the gold-bullion standard, to the gold-exchange standard and finally to the full paper standard in 1971, with eachnew regime less rigorous and more inflation-prone than the one precedingit. Conversely, if the Federal Reserve withdraws basemoney from the economy, the process runs in reverse: credit contracts, andthe whole economy is restrained (See Woolley, 1984; Clifford, 1965). It seems to me that the institutional consequence of these policieswas to restore public confidence in the Federal Reserve, and thus the Fedcould go back to the traditional position that it knows best, no longerfearing that it would eventually be tied down by outside rules whether theywere monetary targets, fiscal targets or a gold standard. inflation subsided, things looked like they might get out ofcontrol on the downside. (1985, May 15). It is the oldest money of civilized man. Friedman and others have argued that if the FederalReserve would simply ensure that the money supply grows at a steady rate,say 4% per year, the economy would also grown steadily and withoutinflation (Friedman, 1959, 198 ) Another policy option has been articulated over the years byessayists at the Wall Street Journal and other conservative publications.This position maintains that the even Friedman's rigid targets for theFederal Reserve are not strong enough. This usuallymeans the redirection of monetary policy from fighting inflation topromoting growth. (Woolley, 1984) By injection or withdrawing base money from the system the Fed hasimmense influence over the economy. Themoney spigots were opened and the economy began a rapid recovery (Roberts,1985). (198 ). It may in fact be that the thirty to fortyfold rise in the price of gold between 1932 and 1979 was sufficientcommentary on the effectiveness of the experts who ushered in the era ofcentral bank-managed currencies (Lehman, 198 ). (1984). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.