Effective Monetary Policy for Emerging Market Economies

Effective Monetary Policy for Emerging Market Economies

Effective Monetary policy

The growth and recovery of U.S. has become quite sluggish from the last years. The fed use several tools to make the monetary policy effective to the prosperity of an economy. For an instance, fed conducts the open market operations, lowing the funds rate and changing the reserve requirements. These tools of monetary policy can be controlled effectively and easily. Taking the example of investment which is influenced by the changing the funds rate, fed deceive to claim by raising the interest rate, when it wants to raise the investment. For instance, it is the ability of a sharp economist or the policy maker to allow the economy to prosper slowly and steadily but without inflation. An active and clear policy maker is one who is ready to deal in ups and downs of the economy. (Boivin, et.al.,2006).

For making the monetary policy effective, fed should purchase more government bonds and monetary assets. Funds should be provided at a lower interest rate if the banks want to increase the lending and the availability of funds should be increased. For the appreciation of U.S. currency, the purchasing of foreign bonds should be increased (Mishkin, F.S. and M.A. Savastano., 2001).

When a country experiences the monetary crisis the demand for the foreign currency is increased and domestic currency depreciates. To tackle this situation, for the domestic consumption exports should be raised up to meet the domestic demands which influence the business activities of an economy and increases the investment. The monetary crisis in the U.S. in turn generated the global crisis in the economy.

Emerging Market Economies

The word “emerging market' is generally misunderstood by economists and analysts, as the countries who show the accelerated economic growth and industrialization. It was the main misleading factor that there is no assurance that the country will emerge into the market eminence, only countries that are likely to show the economic growth. This is a vulnerability of the global crisis of the past few years which creates the possibility that countries can travel in the opposite direction from the developed countries to the less developed countries.

The term “emerging market” in the modern world assumes to be more focused towards social and political changes specifically in the countries that were considered to be less developed financially before. China and India are considered to be the best examples of Emerging Market, most specifically China which is supposed to be the second largest monetary force in the world.

Monetary policy in the face of External Shock

Emerging economies have been framework to explicit reversals in capital inflows, which have severe aftermaths on economic activity and financial stability. Policymakers should respond actively to a sudden loss of external financing and its negative effects on the domestic economy.The globalization process has tightened financial and trade linkages among economies. An element of this process has been a large increase in private financial flows across countries. According to the IMF, the amount of ...