Question

The Federal Reserve is supposed to have some degree of independence from the Federal government. What would be some risks of having the government directly involved in monetary policy? What might be a benefit of letting the government control monetary policy?

Answer 1

Monetary policy includes controlling the money supply in the economy. This could be done by controlling interest rate, federal fund rate, open market operation, etc.

Risks of involvement of government in monetary policy:

No.1) the risk of non-professionalism: government doesn’t have adequate professionalism in controlling money supply. Since the central bank (Federal Reserve) controls the whole banking system, they have sufficient knowledge and control over money. Therefore, only the central bank should be in charge of monetary policy but not the government.

No.2) the risk of biasness: each and every government is actually a political party. They can undertake a policy that favours them; this is biasness and it hampers the economy.

No.3) the risk of damaging the other works: a government has so many works to do – such as internal affairs work, external affairs work, infrastructural work, establishing law and order, etc. If they become busy with monetary policy, those other works could be badly affected.

A benefit:

#) mutual cooperation and double checking: once the policy is created by one party and controls by other party there would be a double checking on such policy. This strengthens the policy itself. This also helps to improve mutual relationship between the central bank and federal government, since they help each other.