Monetary Policy

Essay by PaperNerd ContributorUniversity, Master's January 2002

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As the chair of this newly created central bank, I present to you a guideline statement. This statement will discuss the importance of transparency in our new central bank and will focus on our objectives and principles that will be mandated. Transparency will be one of the most important aspects of this central bank along with accountability and public disclosure. This means that the monetary policy set forth by our central bank will be characterized by openness and lack of concealment. Our focus will be on the clarification of policy goals, policy procedures and the timeliness in reporting policy decision. "Many central banks have found that increased transparency improves the efficiency of financial markets and, therefore, enhances their usefulness for market participants as well as for the central banks themselves. A transparent policy is characterized by lack of secrecy, obfuscation, or ambiguity, and should be understandable to those outside the policy process including both ordinary citizens as well as legislations responsible for policy oversight.

Secrecy can only lead to increased financial uncertainty, causing unnecessary volatility and accordingly, larger premiums on interest rates." (Keleher 1997) This guideline statement will pull together the qualities that have worked so well in other countries central banking system. The first and most important quality I will discuss will be the primary goal of this central bank. We will have one primary focus to aim for which is keeping inflation under control. The bank will respond strongly to changes in inflation, but unfortunately this will lead to larger fluctuations in output and employment. (Walsh 2001) However, we regard financial stability as an important precondition for high growth and employment creation. "High rates of inflation will only Rhodes 2 distort the allocation of resources and it can lead to the unequal distribution of wealth. Inflation targeting should...