Question

To what extent are the principal goals of central bank monetary policy consistent or inconsistent with each other? What does a central bank do when the goals it wishes to pursue directly conflict with each other?

Answer 1

The central bank of any country is also known as the Lender of last resort to the commercial banks. Its major goals also include maintaining price stability of the countries currency by controlling inflation. It makes monetary policies to maintain the balance and stability in the economy.

The primary goals of a central bank becomes contradictory when It has to control inflation in order to stablize the currency. For example for reducing inflation it will use the monetary policy of taking out money from the markets, but this may decrease inflation more than desired and lead to decrease in GDP growth. The exchange rate will increase reducing the exports. Thus although the inflation will be controlled but the stability in economy will get effected.

When the goals of central bank conflict with each it tries to strike the balance. Therefore the rate of reserves and other policies keep changing so that a fine balance may be obtained. An appropriate inflation rate is maintained.