The continuous internationalization of capital markets has risen the concern about its implications on conducting macroeconomic policies (Pilbeam, 2013, p.74). A possible predicament is the impossible trinity, or the tenet that a country can only pursue two of the following three options: perfect capital mobility, fixed exchange rates, or autonomous monetary policy (Shambaugh, 2004, p. 302). Nevertheless, as of September 2011, Switzerland has attempted to pursue all three options, by continuing an expansionary monetary policy after adopting an exchange rate floor of 1.20 CHF per euro (IMF, 2013, p. 5). In theory, this policy should be rendered ineffective given Switzerland’s perfect capital mobility and its fixed exchange rate system (Mundell, 1963, p. 484). Nevertheless, Swiss real GDP still increased between the implementation of the floor in 2011 and the termination of the monetary expansion in 2012 (OECD). The aim of this paper is to elaborate on this inconsistency using the Mundell-Fleming model. First, the structure of the model and its assumptions are explained, as well as the characteristics of Switzerland’s economy that are relevant to perform the analysis. Subsequently, the course of events in Switzerland from 2010 until 2012 will be analyzed and finally discussed in the conclusion.
The Mundell-Fleming model is a macroeconomic model analyzing aggregate demand, developed independently by both Mundell (1963) and Fleming (1962). The most important feature of the Mundell-Fleming model is that it incorporates international capital movements into the IS-LM framework, which is essential considering the worldwide trend towards financial integration (Mundell, 1963, p. 475). The leading assumption is a small open economy with pe...
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...re: Palgrave Macmillan.
Ramírez, C.D. (2001). Even more on monetary policy in a small open economy. International Review of Economics and Finance 10(4), 399-405.
Shambaugh, J.C. (2004). The effect of fixed exchange rates on monetary policy. The Quarterly Journal of Economics 119(1), 301-352.
Swiss National Bank (2011). Monetary policy assessment of 17 March 2011. Retrieved from the SNB website at: http://www.snb.ch/en/mmr/reference/pre_20110317/source/ pre_20110317.en.pdf
Swiss National Bank (2011). Swiss national bank sets minimum exchange rate at CHF 1.20 per euro. Retrieved from the SNB website at: http://www.snb.ch/en/mmr/reference/ pre_20110906/source/pre_20110906.en.pdf
Swiss National Bank (2014). Monetary policy assessment of 20 March 2014. Retrieved from the SNB website at: http://www.snb.ch/en/mmr/reference/pre_20140320/source/ pre_20140320.en.pdf
The Poole Model is a macroeconomic model where its main objective is to answer the discussion on whether monetary policy should be conducted using a money-supply rule or an interest-rate rule when managing the economy. In the Poole Model, the Central Bank’s objective is to minimize the loss function:
The Federal Reserve and Macroeconomic Factors Introduction The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession.
The United States is the leading economy across the globe and experienced several tribulations in the recent past following the 2008 global recession. Despite these recent challenges, there are expectations among policymakers and financial experts that the country will experience solid economic growth. Actually, financial analysts have stated that the U.S. economy will be characterized by increased consumer spending, increased investments by businesses, reduced rate of unemployment, and reduction in government cut. Some analysts have also stated that the country’s economy will strengthen in 2014 with an average of 2.7 percent or more. However, these predictions can only be understood through an analysis of the current macroeconomic situation in the United States.
A theme that dominates modern discussions of macro policy is the importance of expectations, and economists have devoted a great deal of thought to expectations and the economy. Change in expectations can shift the aggregate demand (AD) curve; expectations of inflation can cause inflation. For this reason expectations are central to all policy discussions, and what people believe policy will be significantly influences the effectiveness of the policy.
Currently the policy is expansionary. This involves increasing AD, therefore the government will increase spending and cut taxes. Lower taxes will increase consumers spending because they have more disposable income. This will worsen the govt budget deficit.
The leading model, Monetary Model links exchange rate movements to the balance of payment, which is used for medium to long term analysis. The following assumptions cons...
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
In this essay, we initially examine what led to the end of the Bretton Woods System. Although several factors have been identified, the ones highlighted in the essay look at the ‘Growth in capital mobility’ during that period and the ‘Role of the United States’, which is further elaborated in Section I of the essay. Under Section II, the essay aims at analysing the performance of the Bretton Woods System. The analysis is done on the basis of looking at the ‘Role in the transition of economies post World War II ‘ and ‘Growth of trade’ during that period. Factors that led to...
Companies. Retrieved July 4, 2008, from University of Phoenix, MMPBL-501 Web site. University of Phoenix . ( 2008). Economics for Managerial Decision Making
As a result of those huge economic and social issues resulting from Eurozone crisis, finding a solution to the currency problem become an urgent as well as a crucial task of the member countries. In order to fix this problem, there were many different proposals submitted by all parties concerned. Policy implementations taken by the European Central Bank have had some powerful impacts on the economy of the union, and therefore the idea concerning a separation within the union has almost disappeared. However, to be able to find an effective and permanent solution it is needed to focus on long term fiscal and monetary policies.[1]
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
Machiraju, H. R. , 2002. International Financial Markets And India. 1st ed. New Delhi: New Age International.
The liberalization of capital developments and deregulation, particularly of fiscal administrations, prompted a spurt in cross-border capital flows. The globalization of financial markets has triggered a rapid growth in investment portfolio ...
Ferguson et al. International financial stability. Geneva: International Center for Monetary and Banking Studies, 2007. Print.