Question

Why many central banks rejected their former approach such as controlling money suplly or interest rate setting?

Answer 1

Central backs across the world sort to both fiscal and monetary policies in which , in order to stabilize the economy , they issue or instruct the govt to issue certain measures to regularise and normalise the economy. Central banks started to avoid the monetary policies like controlling money supply and changing the interest rate settings because :

1. Fluctuations in money supply can regulate the capacity of individuals in the economy. But it must be understood that not every section is affected directly with changing money supplies. A majority section of the economy engages to unregulated and unregistered sections which is the informal sectors . For sections like these , money supply is not useful.

2. Rising money supply can cause a debt like situation for the economy , for giving a boost in the economy with high money supply.

3. Changing rate of interest rates can cause the Economy to have instability while dealing with foreign exchange . A high rate of interest causes an increase in ghe the export which is good for economy. Although high interest rates causes long term debt situation for the economy.

4. For both money supply increase and interest rate changes to show effect, it takes a lot of time. In addition the response periods to the changing rates could be different for both the domestic and foreign markets. Hence this difference causes lags in the effects of outcome of monetary policies to implement. The lag can cause lesser impacts of policies.