Question

Price stability is a natural long-run monetary policy goal for a central bank much more so than attaining sustainable full employment. True or False? (300 words)

Answer 1

Ans : False ,Central Bank attain more on Sustainable full Emplyment.

Central banks are required to pursue multiple macroeconomic (and sometime microeconomic) objectives. These included sustainable growth, high employment, efficient allocation and use of resources, security of the payments system, and many other elements that are supposed to guarantee “economic progress”.

Central banks were also, to large extent, subordinated to government authority and had a very low level of administrative, target, and instrumental autonomy. In more recent years many countries have moved, steadily, towards granting independence to their central banks. Such movement has been prompted by the recognition that independence is a crucial factor supporting the credibility of the institution, which is a precondition for effectiveness and efficiency of monetary policy. Together with the spreading of central bank independence, there has been a tendency to limit the number of objectives that the autonomous central bank should pursue.

In fact, it has been widely claimed that, in order to boost credibility and to avoid the time inconsistency problem which frequently affects governments policy decisions, it is necessary to set a single objective for the central bank, and that the single objective should be to attain and to maintain price stability.

This is the corollary of the analytical conception that monetary policy is best suited to achieve medium-term control over inflation, while its output, employment, and allocative effects are not regarded as either predictable or sustainable and, therefore, it would not be feasible to make the achievement of growth or the lowering of unemployment a realistic monetary policy objectives. Moreover, it has been broadly accepted that if other macroeconomic objectives, beyond price stability, are placed within the explicit responsibility of the central bank, this would tend to wear away central bank credibility and to weaken its ability to attain its primary objective. Within this framework, it has become accepted wisdom to curtail, or at least to minimize, the role that central banks should play in other macroeconomic policy areas.

However, current developments in monetary theory, coupled with the recent practical experience of many and diverse central banks, suggest that in order to discharge their responsibility, and achieve and preserve successful macroeconomic stabilization, central banks need to deal with a myriad of accompanying circumstances within which policies and institutions develop. These circumstances, and the rapid evolution of financial markets in recent times, require that central banks focus, in addition to pursuing their primary objective, on some additional targets by addressing, with distinctive emphasis, a number of basic principles of monetary and central banking policies and analyze their significance for the achievement and the maintenance of macroeconomic stabilization. The purpose of this paper is to review, in light of current experience, the challenges for the central bank arising from some of these developments.

Banks deals with the question of targeting monetary policy when inflation has been, indeed, conquered. It discusses the importance of ensuring a sound financial system and the role that central banks have to fulfill in this regard, relative to the role of the marketsand discusses the challenges for monetary policy that arise from the explosion of derivative markets.