Question

Discuss the monetary policy in a country (developing / developed). Prove your answer as much as you can.

Country: Switzerland

Write it in simple words

This essay includes:

1.The marker for reserves and federal funds rate

The federal funds rate(i_ff) - the discount rate(i_d) - rate on reserves(i_or)

2. Effects of change in monetary policy tools on FF rate

OMO - DR - RRR- ior

3. Conventional / nonconventional MP tools

Answer 1

Monetary policy is the policy which is used by the government who have authority to manage finance or we can say inflow and outflow of money supply in order to control inflation and deflation. The authority is called central bank. They will control the inflation and deflation in economy by having a control on demand for money and supply of money. In this essay we will covered all the above things. Developing and developed countries have to face different effects of monetary policy. Here, Switzerland is given. And as we know as it is one of the highly developed countries. As it is developed because of Various reason like -,highly resources, highly techniques as they allow hawala transactions and people usually use their bank account in order to keep their money more safe. ,however not everyone is developed by allowing these types of transactions .So the point is there is difference in developed countries and developing countries because they are somehow lacking in technology, resources ,etc.

Federal Reserve rate is the rate at which banks usually use when they lend their reserves to another bank as overnight in order to fulfill their minimum reserve requirements. In Switzerland, SNB takes care of this rate. However discount rate may be the interest charge for lending for Federal Reserve or it can be social discount rate in which we gave more importance to present money than future.  

There are various tools of monetary policy like -(OMO) open market operations, DR -direct reserve requirement rate, RRR-required reserve ratio, rate on reserve, etc. These are all above tools. Whenever there is change in monetary policy tools they all effect federal funding rate is as follows :

• Open market operations in fully developed countries like Switzerland is controlled in very effective way. Their government have somehow idea and control on FDI -foreign direct investment. But then too it effects the federal rate. Open market fully promotes foreign direct investment so whenever there is fdi ,people have more amount of money and if they have more money they simply deposit their money in bank then bank doesn't require to borrow these funds for reserves hence this reserve rate whether it is higher or lower it is of less use.
• Direct reserve requirement is one of the important tools. Banks usually wants to take funds in order to fulfill their reserve required so whenever bank requirement is fulfilled by any source federal rate will reduce and when it reduces banks can easily access more funds and can lend more which will help to recover from recession if any.
• Required reserve rate. Central bank use this rate as whenever there is more flow of money in economy they raise the requirements of maintaining this ratio as high so that they can control the inflation. Usually central bank specify the ratio here. Like your 20%deposit should be cash, 2%in form of gold. So whenever this kind of ratio are specific banks need to follow that guidelines. If one bank have more gold then they required to convert into cash. As this thing effect the federal rate. When banks have more reserved cash fed rate is low otherwise it will higher %.
• Rate on reserve is the rate which is is required by banks to maintain as per central bank guidelines. If this rate of reserves become higher, there is requirement for bank to maintain more reserved then they are not able to lend more and at the same time federal rate will goes up.

Conventional means traditional in general terms. As we had already discussed the monetary policy tools. Conventional monetary policy tools are the tools used by central bank in order to control the supply of money which they generally employs as short term interest rate in any economy. While non -conventional tools are like -quantitative easing. Quantitative easing means a another way than traditional way in which central bank plays an important role in order to encourage the supply of money by purchasing large amount of securities from open market.

These tools are also used in economy. Hence, everything which is part of economy is effected by money so any decision of central bank whether it is of developing countries or developed countries all are effected. The difference is just developed countries all able to manage their market in better manner than developing countries.