Essay on Monetary Policy: Safeguarding Financial Industries & Public Confidence

Introduction

The finance industries are responsible for formulating and monitoring money creation and circulation. As a result, they have to employ the monetary policy to effectively maintain the stability and ensure the adequate flow of money to the productive sectors. The banking and financial system depends on effective banking operations, thus the need for guidelines for maintaining public confidence in the system. As a result, the monetary policy helps the financial industries to protect the interest of the customers while providing cost-effective banking services. The monetary policy impacts the decision of money creation, thus allowing the bank to have plans on fetching more returns through the deposits as well as loans. Besides, the monetary policy has the task of regulating the performance of banks in the economy basing on the macroeconomic variables such as inflation. The system also plays a role in regulating the supply of money basing on the rate interest while promoting economic growth and stability. The monetary policy maintains the relationship that exists for the interest rates and money lending in the economy. As a result, it leads to an understanding of the price of money an individual has to pay to be eligible for borrowing funds from the bank. The bank has the task of facilitating the external trade as well as payment with the monetary policy, ensuring development and systematic foreign exchange is maintained.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

The creation of money in the current economy is controlled through the monetary policy as it affects both real sectors and the financial market. The system transforms the real factors with the variable in the marketplace while bearing the short term interest implications. The monetary policy system is capable of laying down strategies and tactics that allow the banks to achieve the final objectives by effectively running the operational procedures. Through the financial system, the policies laid down ensures the economy useful handle the exchange rates. An explicit ultimate goal characterizes the inflation targeting in terms of the price of increase. The need for a stable economy entails marinating the monetary policy which influences the operation as well as the base money, thus determines the outcome.

The monetary policy gained recognition in the 1970s with various countries adopting it. With technological advances as well as the movement of money across the borders, the monetary policy has witnessed crucial changes. Smoothening the money circulation process requires the monetary system. The monetary policy framework for the monetary policy has given the financial organizations enough freedom to use the instrument of the monetary system based on their competence. The monetary policy entails the macroeconomic tool through which the monetary authority regulates the supply of money basing on the rate of interest and money creation. It aims at promoting economic growth and stability. Financial organizations can choose from the various monetary transmission channels, including the quantum channel, interest channel or the asset price channel.

The purpose of this study is to provide an overview of the money creation in the modern economy while examining the impact of the monetary policy instrument in controlling the money creation. The study evaluates the role of the monetary policy in ensuring financial stability, persistent growth and regulation of the inflation pressures in the economy. The operation of the monetary policy tool is also examined based on the interest income. The paper also studies the significant changes in the monetary policy tool and its impact on the interest profitability of the bank. 

Literature Review

In the study on money creation in the modern economy, McLeay et al. (2014) explain how the majority of money in the current economy is created through loans. The practice of money creation is based on misconceptions that range from lending out deposits to multiplying the central bank money. The money created in the financial systems is controlled by the monetary policy, which entails setting out the interest rates with the aim of ensuring money flow is maintained in the economy.

In the study on "monetary policy and bank lending," Borio and Gambacorta (2017) analyzed the impact of the monetary policy on money creation and bank lending. The study entailed a low-interest-rate environment with 108 samples of a large international bank with its empirical analysis basing on money creation analyzed. The study focused on the effectiveness of monetary policy in controlling and managing banking lending and money creation, especially in the modern economy, when the interest rates become low. The results of the study indicated the effectiveness of the monetary system on controlling the business and the financial cycle conditions. It based on specific characteristics of the bank, such as capitalization and liquidity. The policy has an impact on low rates of profitability of the banks, thus the need for banks to take sufficient measures to boost demand in the banking system. Since growth in the banking sector has been disappointing, the possible reasons for the outcome include the monetary policy facing stiff resistance. Besides, other factors, such as debt overhangs have played a role in impairing the banking system. They have contributed to low-interest rates; thus the monetary policy loses its traction

Xiong et al. (2017) presented a model that described the mechanisms of creation of money in the banking system as well as its circulation in the modern economy. The study focused on the role of debt in the macro phenomena. It entailed an open economy comprising of a banking system while basing on intermediary financial views on creation and circulation of money. Identifying the determinant of money multiplier revealed the contrast to the model of money creation. Money circulation is influenced by the borrowing behaviors with other money-related factors such as the expenditure as well as repayment behaviors of the debtors. In examining the modern monetary theory, the study reflected on the monetary macroeconomics basing on the issue of maintaining financial stability as well as an open economy. The study provided recommendations for monetary policy to take account of political economy difficulties to ensure confidence is generated in the financial institutions.

Monetary Policy and Money Creation

Money creation in the modern economy requires effective regulations as well as methods to ensure financial stability. Stein (2012) defined the fundamental failures in the market resulting from the money creation in private sectors without any regulations. As a result, there is a need to simplify the economy by adopting the monetary policy tool for open market operations, which has the capability or regulating the externalities. The study investigated how monetary policy affects the inflation and output of the financial institution. It entailed the standard models which reported the empirical cross country studies basing on the inflation and output impacts. From the survey, there is a relationship between the conventional models and assumptions in the banking system. However, the banking regulations based on the monetary policy are significant for measuring the growth of the organization. Response from the various financial organizations revealed that changes adopted from the monetary system are crucial in the transmission of the institutional processes.

In the study on the monetary policy, Maynard (2014) examined the responses to the monetary po...