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Hatim George Hatim *: theoretical framework for monetary policy: concepts, tools, and mechanisms of transition **
08/11/2015
Download PDF Abstract require any analysis or sober assessment of monetary policy Wi understand and grasp the consequences of good and justifications for any of the measures of this policy briefing Bmnzawmtha analytical. The aim of this paper ...
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Abstract
Require any analysis or sober assessment of monetary policy Wi understand and grasp the consequences of good and justifications for any of the measures of this policy briefing Bmnzawmtha analytical. This paper aims to provide structure to display Althalilahalnzerah monetary policy. Paper begins by defining the monetary policy and identify key variables, and then move on to display the tools available for this policy to influence these basic monetary variables path. The paper pays special attention to explain the mechanisms by which exercise through which monetary policy variables impact on real variables (such as production and employment) and the price variables. The paper also includes a brief overview of the historical development of monetary policy in developed countries.
1 monetary policy and tools
1.1 monetary policy definition
Monetary policy is defined as " set of actions taken by the monetary authorities to influence the supply and cost of money and credit in order to achieve specific national economic goals that " [1] such as economic growth, full employment of the labor force, and price stability. This cash Altaravellsaash implicitly refers to the existence of two approaches for the management of monetary policy. Monetary authorities can work through the development of a specific target money supply, leaving room for interest rate to move as imposed by market forces; or that the monetary authorities determine or targeting a specific interest rate in advance and then holds the change amount of money supply so as to ensure their conformity with the required quantity when target interest rate or time. [2]
2.1 The role of monetary policy
Monetary policy is seen as one of the macroeconomic policies to manage demand. [3] This policy exercised influence in the economy through the promotion of aggregate demand for goods and services, or through pressure toward reduced, as required by economic conditions. Not only it has the effect of aggregate demand only the level of production, but also extends to the general level of prices. The price of all schools agree that after reaching the full use of the productive energies of the increase in demand in a free and closed economy dissipate entirely in a commensurate increase in the general price level, and assuming the stability of other factors. But the economic schools differ among themselves about the behavior of the general price level when aggregate demand change before the arrival of the economy to make full use of the productive potential of the available points. Of these schools supposed to be sticky and slow change and weak price sensitivity to changes in total spending as long as there are unused productive capacities, assuming wages and other factors stability. This means that it, in light of the wage stability and other Raawaml hypothesis, that the total spending changes translate into significantly, though not fully, to the increase in production, while prices remain quasi-stable, meaning it rises very slowly, to be achieved full exploitation of the productive energies . And it confirms another school that production and prices are changing overall demand change simultaneously and in the same direction, albeit at rates varying change heading towards decreasing for the production and upward for the price, and that the degree of escalation exploit the available production capacities. The degree to approach or move away from the full utilization of productive capacities available one of the important determinants of the degree of response to all of the production and prices of changes in aggregate demand in the short term.
Interest rate provides the link between the economy and the real cash economy, ie between the money market and credit on the one hand, and between the flow of goods and income on the other hand. As will be explained later, [4] contributes to the interest rate in determining the level of gross domestic product through its role as one of the important determinants of the components of domestic aggregate demand. As most of the deals, if not all monetary theories that followed the quantity theory of money as primitive, with the interest rate, in terms of being expresses the cost of the opportunity to keep the money, one of the important variables specific to the demand for Alncodaly along with income and other variables. Assuming the stability of other factors, confirms this theory is that the demand for money varies inversely change the interest rate; or in other words that the demand for money inverse function in the interest rate. In a free market free of restrictions on the demand, the equilibrium interest rate is determined by the intersection of curves on the overall supply of money and the total demand, and that is a price that equals the total demand on the overall supply of money with her.
3.1 money supply and monetary policy
Display is the pivotal variable cash in the monetary policy. The money supply is determined according to the following equation: [5]
Or that
Assuming that
represents where
= Width = cash currency in circulation + deposits in banks excluding the deposits of the central government.
= Monetary base = currency in circulation + bank reserves or reserves banks
= Ratio of currency in circulation to deposits
= = Bank reserve ratio of reserves to deposits ratio in banks
= Money multiplier
It is intended to:
- currency in circulation = currency notes and coins in circulation
- bank reserves or reserves banks = currency in banks cabinets + bank deposits at the central bank.
Analasthaddam the right of any of the equations (1) or (2) above requires a distinction between the legal reserve ratio / mandatory [6] and the percentage of the actual reserve. And there is no justification for the inevitability of a theoretical match Monday at the level of the actual reality. It is the first to determine the ratio decision issued by the monetary authorities. And it indicates the maximum Mgulwbha allows banks to retain deposits compared to what is owned by the reserves. This percentage is legally binding on all banks in the sense that all banks adhere to a minimum. It is clear that it must be the first to resort to the ratio when it is required to identify the money multiplier theory and theoretical cash offer, ie the upper limit for each of the cash money supply multiplier under the legal restriction on the reserve ratio. As indicated by call, the second figure reflects the actual ratio of reserves to the banking actual bank deposits. However, the volume of bank deposits at the level of the actual reality exclusively on the reserves held by banks does not depend only but also depends to a large extent, especially in developed countries, the loans granted by the banks and the investment commitments for these banks. That the Bank has granted a loan means that he is at the same time creating a deposit an equivalent amount in favor of the borrower; as well as, most of the investment commitments of banks financed through the banks to create deposits in amounts equal to the value of investments for the benefit of those concerned banks took over the purchase of investment assets from them. In developed countries, most of the actual money supply is created through the process of creating this bank deposits, that is, through the granting of credit. This was due to the process of creating deposits and credit granting this responsibility to create most of the actual money supply in developed countries; and back to her thus the significant role of banks in determining the actual money supply. [7] It is obvious that the calculation of the actual monetary multiplier and display the actual cash requires the adoption of the second percentage of any reserve ratio actual.
Will be in the rest of this search using the term cash offer to express the actual money supply. Due to the change in money supply theoretical change cash basis, assuming the stability of other factors as illustrated by equation (1), it will be sufficient cash basis the term to refer to: the change in the cash basis and the change in the money supply theoretical output with him.
4.1 monetary policy tools
Central banks of developed countries be able to influence the money supply through a cash basis. These banks and monopoly control over all of the currency in circulation and the statutory reserve ratio, which is determined in the light of banking reserves. On this basis, usually entrusted with the responsibility of implementation of monetary policy central banks. Central banks are based in the implementation of monetary policy, according to any of the two approaches referred to earlier, to employ their ability to control the Alnkadiballju basis to all three categories of tools reprints of selectors display the same criticism: [8]
Open market operations (Open Market Operations)
Discount window service (Discount Window Facility)
Reserve requirements (Reserve Requirements)
1.4.1 Open Market Operations Open Market Operations [9]
Open market operations are the basic tool and the most effective and flexible implementation of monetary policy, specifically to change the cash basis and short-term interest rate, which serves the direction of economic policy. These processes are summarized by the central bank buying and selling of financial assets (for example, but not limited to, securities issued by the Treasury, gold, foreign exchange) through the market and employing cash basis for the settlement of these sales and purchases. The process of buying the central bank securities lead to expansion of the monetary base, while leading to sell financial assets to process the contrary. To settle the procurement process, the Central Bank either pay the amount in cash to the seller or editing the instrument on behalf of the seller and the amount that will find its way after deposited in the banking system to return to the reserve bank account of the seller, or one of the other banks, the central bank. In the case of the central bank to sell financial assets in the market, the sale takes place either through the receipt of the Central Bank of the amount in cash from the buyer settlement or through the instrument deducted at the end of the reserve earnings account of the Bank of the buyer, or to one of the other banks, the central bank. It is clear from equation (1) These operations give way to the possibility of changing the money supply in the same direction of the change in the monetary base. That any expansion or contraction in the monetary base leads to an improvement or deterioration in exchange for the ability of financial institutions to grant loans and credit.
Constitute a public securities (ie, bonds, drafts and notes issued by the Ministry of Finance and Central Bank) primary nerve financial assets that the central bank focuses on dealing in open market transactions. The central bank depends on the purchase and sale of these securities in the open market to make a quick change in the money supply or the interest rate in the short term.
Open market operations also include operations of central banks in buying and selling foreign currency in the local market. These operations, like any sale and purchase of securities handled by central banks, lead to a change cash basis; however, it is distinct from the asset purchases of public securities influence exerted on the local currency exchange rate against foreign currencies any on the amount of the necessary local currency for the purchase price and one unit of foreign currency. [10] Valmarod of foreign exchange in the domestic market is increasing at the central bank, which is owned by the sale of some of this criticism in this market, and decreasing the supply of foreign exchange at the bank purchased from the market. Assuming the stability of other factors, the local currency exchange rate in accordance with the definition adopted by this paper (the amount of local currency needed to buy one unit of foreign currency) drops increase the supply of foreign exchange and rising Ptnaqs. In countries whose economies on the production and export of a limited number of raw materials, oil such as States, take the central bank's operations in the sale and purchase of foreign exchange role may exceed importance of buying and selling public securities (state bonds and remittances and treasury bills and the central bank) in effect on the cash basis Money Supply. With the expansion of globalization and the related surge in foreign trade and in the freedom and speed of movement of capital between countries, began the role of the central bank's operations in the sale and purchase of foreign currency gain increasing importance in determining the course of monetary policy even in developed countries and in the diversified economies of developing countries variables.
2.4.1 discount window service Discount Window Facility [11]
Some states use the term existing facilities (standing facility) to denote this tool. These provide the window to banks and other depository institutions the opportunity to receive from the central bank on short-term loans to address the lack of an emergency short-term liquidity or in the reserves arising bank's internal imbalances or external, for example: falling unexpectedly in a reserve bank without the legal limit, or lack of temporary liquidity resulting from the sudden jump in demand for borrowing and liquidity of the bank, or drop unexpectedly in the flow of liquidity to Almsrv- repayment of loans by the bank clients, Ouan structural defect in the internal financial conditions for banking institution concerned, or for financial confusion in the general economy . Interest on the loan and pay either when repayment of the loan or advance is deducted from the loan amount when the grants. It is clear that the interest rate is called in the second case to the discount rate discount rate) ). and the use of this service somewhat limited what in normal conditions it takes only paramount importance and become almost mandatory during the severe financial crises that are imposed on the central bank to exercise one of its core functions and of being last resort lending (lender of resort are) .
Consequent resort to this service changes in the monetary base. That borrowing from the central bank would broaden the borrower from the bank reserves at the central bank, which shrink again when repayment of the loan. In some cases, the central bank deliberately use this window to change the cash basis in support of open market operations in this area. The establishment of the Central Bank to reduce the discount rate would encourage banks to borrow from it which leads in the case of receiving to expand bank reserves has thus expanded to a cash basis; and the opposite occurs when the central bank decides to increase the discount rate.
3.4.1 reserve requirements Reserve Requirement [12]
As is known, the banking system's ability to create money stems from the fact that depositors rarely withdraw their deposits at once or completely within a short period of time; but that the drag operation is usually performed intermittently, irregularly, and installments of varying amounts, and over time along much What is relatively long. This fact allows banks to continue to expand in the granting of loans and in the investment of its liabilities and its connections through expansion in exchange for their deposits as long as it has enough reserves position to repay the amount of any one of the owners wants deposits withdrawn in cash accounts. I knew the process of money creation according to this mechanism as "partial reserve banking Fractional reserve banking . " [13]
One of the core functions of central banks to protect depositors and the financial system, and in preventing the occurrence of financial crises. And insurance so the central banks determine reserve requirements by issuing legislation which obliges banking institutions to retain a percentage of their existing deposits as a reserve currency reserves is distributed between its deposits in their vaults and maintained by the Central Bank. As is clear from equation (1) the legal reserve ratio or the mandatory is one of the determinants of money multiplier theory, and therefore it provides an additional tool for central banks to influence money supply. However, changing the proportion of legal reserves do not necessarily require immediate and direct change in the size of the reserves of the banking system as a whole or for each Aadaih institution individually, but it definitely will automatically lead to change the upper limit of the legal allowed by the Central Bank of the amounts of deposits that banks can hold it with its of reserves. [14] utilized so that under certain reserves, the upper limit of the total amount of deposits that can be for the banking system as a whole or for each banking institution individually retained by law (ie, without prejudice to the instructions of the Central Bank) is reduced up this percentage drops upside. Assuming the stability of other factors, the change in the legal ceiling for the total size of deposits associated with change in the statutory reserve ratio of the banking system and in the resulting change in the monetary multiplier theoretical mean necessarily change what can be displayed from criticism (ie, the cash offer theoretical).
2 historical development of monetary policy
Monetary policy in the seventies of the last century, focusing on the use of the money supply to influence economic variables and movement so as to ensure the achievement of national economic goals. This focus and was associated with a deep faith in the validity of the quantity theory of money. This theory assumes both the initial old as or as updated (Alfredmanatih, relative to Milton Friedman) that the amount of money directly affect the prices without have little effect on economic activity impact, and that market forces enough to pay the production and operation to their levels equilibrium. [15] and go both schools to the rate of change in prices equal to the rate of change in the money minus the rate of change in production. To reach this conclusion, based on the first school to the stability of money rotation speed and constant factor of which appear in the equation of the theory of the amount of money hypothesis. And rejects the second school Alfredmanatih money rotation speed stability hypothesis, and that the money go to the rotational speed of this is a close relationship function variable demand for money, and that it maintains stability as long as the demand for money maintain the stability function. Assuming the stability of demand for money function get rid of this school that securing price stability does not require monetary policy only change the money supply at a rate equal to or close to production growth rate. [16] and has spread the use of this policy in the advanced industrial countries during the period from the mid-seventies of the century last until the middle of Osmaninyate. [17] The shift came to it as a reaction to the previous Keynesian policies failed to curb inflation and achieve monetary stability. [18] did not pay this policy attention interest rate Blartkzat entirely to achieve the desired goals (reduction of inflation rates and the achievement of price stability) to target a specific path for the money supply, which the central bank takes action to achieve the task. It also has distanced itself from interference in determining the interest rate, but left him full freedom to change and adapt as dictated by the data and economic conditions and personalized supply and demand for money and credit conditions. On this basis, it uses the term "monetary targeting or quantitative or Quantitative Monetary Targeting "to refer to such a policy.
This policy does not have the transmission mechanism and clear except for the presumption that the amount of money a direct impact on prices and that the market forces capable to pay the production and operation to their levels equilibrium. [19] In spite of the success of this policy in containing inflation, but was abandoned in most countries adopted for several reasons. It has resulted in a commitment by the rise of interest rates to very high levels and the entry of the economies of a number of the countries concerned in a steep recession associated with unemployment tyrant. [20] also reinforced a belief among monetary authorities that the extensive and rapid spread of the financial liberation inventory of effective tools to control money supply. [21] as analytical studies confirmed the standard on the instability of the demand for money and the lack of money circulation speed stability function, which points to the collapse of the causal relationship between the amount of money and the general level of prices. This collapse of the relationship has not only led to stripping quantification of the basic theoretical Mrtkzha policy, but also made it difficult to determine the growth rate for the amount of money or lead to ensure price stability. [22]
After the failure of quantification approach took a lot of countries, especially the developed ones, Moving successively since the eighties of the last century to another approach to monetary policy is based on the conceptual framework is different. [23] The second school is characterized by clear Keynesian roots. Monetary policy according to this school perspective is essentially a policy to manage aggregate demand, and that its impact is not confined to only the level of production, but also extends to the general level of prices. This school and put the weight of its monetary policy in the interest rate center, and deal with him as a key tool to help them accomplish their goals. [24] summarized this policy to work to control the path of interest rate short-term to pay for the course and the movement of economic variables college so as to ensure the achievement of its goals with the commissioning authorities Cash / Central Bank the task of changing the money supply so as to ensure check short-term interest rate target in the financial markets. At present monetary policies of many developed and developing countries with interest rate short-term deal as a basic executive its tool.
3 policy transmission mechanism of monetary Monetary Transmission Mechanism
1.3 Definition and stages of the transition mechanism
Exercise monetary policy role in economic life through what are its effect on aggregate demand in the economy. and uses the term mechanism to move to indicate the "mechanism or how they managed to changes determined by the monetary policy in the presentation of the nominal exchange or interest rate short nominal term of the impact on real variables such as production and operation. " [25] and this requires an implicit definition of price stability, or the slow pace of change, so as to ensure the exercise of monetary policy in general and the interest rate is particularly important and influential role in the real economy movement. Under this hypothesis, such as the change in the nominal values of monetary variables (base and supply of cash and the interest rate) necessarily change will be reflected in the real values. But some people find that price stability or slow change hypothesis lose monetary policy and one of the important goals of securing the stability of the domestic commodity prices. They prefer to use the term mechanism transition "refers to the channels that you can monetary policy through which the group, often after long and variable periods and unpredictable Bamadha accurately, the impact on production and prices," [26] or "Alyalamlah which can monetary policy decisions by which from to denote the impact on the economy in general and on the general level of prices in particular. " [27]
Pass the effects of the monetary policy transmission mechanism (ie the impact of the change in the cash basis and interest rate) to the field of production and prices connected Among the series of stages. Starting, changing leads in the monetary base or official interest rate the official interest rate determined by the short-term central bank to change money market conditions as expressed in interest rates and other asset prices and the exchange rate and the general situation of liquidity and credit prices. In the next stage will lead to changes in the conditions of the financial markets this to change in the household sector and the business sector spending in the external sector, and perhaps in the government sector spending as well. According to the analysis of the theory of macroeconomics, the change in aggregate demand components will lead inevitably to the eventual change in the gross domestic product and its structure and in the general level of prices. [28] At any time, the degree of production affected by the moment or price changes spending power depends on several factors including: the surplus space in production capacities and the degree of physical prices for the wife and the form of curves and the marginal productivity of production. [29]
Central Bank plays a pivotal role in the mechanism of the transition administration in guiding tracks for being a monopoly enterprise cash basis on the one hand; and as the body responsible for implementation of monetary policy
On the other hand. When you adopt a monetary policy quantification money supply, the Central Bank to focus on changing the cash basis to resort to monetary policy instruments, and in particular open market operations approach, and to ensure the achievement of the target change in the money supply, which usually determines the light output or total production change; and leaves the Bank the fate of the various Bamadha interest rates to market forces. This means of course that the cash basis according to this approach is not being changed according to changes in the demand for money, and that changes in the demand for money is mainly reflected in pressure on the path of interest rates.
According to the second approach, limited interest in monetary policy and the central bank interest rates in the course of control. To achieve this, it assumes the central bank to set interest rate that gives the Alsmalve-term secured loans with very short (ranging from one night to two weeks). Usually it called the official interest rate this interest rate monetary policy (monetary policy interest rate) , and Acronym policy interest rate. The central bank employ monetary policy tools, in particular the open market operations, to change the cash basis so as to ensure the balance of supply and demand for short-term securities and loans at the specified policy or predetermined target interest rate. That of course means that changes in the demand for money will face action from the central bank to change the money supply so as to ensure the stability of the policy interest rate at the planned level to him. It is hoped that the move change in the policy interest rate to changes in the same direction, but not necessarily at the same rate, the interest rate for loans and deposits of different Bamadha prices through arbitrage mechanism (arbitrage) and which are intended direction of returns on investments with similar risk to equal through a mile of financial capital to go through a time of financial-yielding investment opportunities to lower higher-yielding opportunities and asymmetric risks or after the deduction of the difference in the risk of expected returns. [30] and is expected to respond to short-term interest rates quickly and strongly to changes in interest rate policy. But as a result of the extension of loan periods, the long-term loan interest rates are usually less sensitive than other interest rates to changes in the policy interest rate change and do not necessarily always in the same direction of change in it. According to data expectations for the structure of the time theory of interest rates The Expectation's Theory of the Term Structure of Interest Rates The interest rate long-term is simply the average interest rate short current term interest rates short future term expected in the long future term which necessarily be unclear and fraught with danger. [31] Accordingly, the interest rates for long-term not only what happens to interest rates, short-term at the present time, but also what is happening to expectations about the future path of interest rates, short-term, which represents the prevailing short-term interest rates at the present time one of its determinants and not only specific affected. The change in policy towards a certain rate of interest does not guarantee in itself change the long-term interest rates in the same direction as it is the case for short-term interest rates. Ensure that this requires that the expected path of interest rates short-term future is of a similar direction to the direction of change in interest rate policy. [32]
In order to exercise monetary policy in general, and the interest rate in particular, influential and important role in the real economy movement becomes necessary that prices are either stable or slow change. Under such a situation, the change in the nominal values of monetary variables (base and supply of cash and the interest rate) necessarily change will be reflected in the real values. For this reason, the follow-up to the effects of monetary policy at the level of the actual reality requires a distinction between nominal interest rate and real interest rate. Unlike the nominal interest rate, the real interest rate measures the true cost to the borrower and the real return to the investor after excluding the impact of price change on the value of the cash flows, and is expressed in the following equation: [33]
As it represents:
the real interest rate =
= Nominal interest rate
= the percentage change in the general price level
2.3 channels Jump:
Changes of the interest rate move to aggregate demand components and then to output, employment and prices across three channels:
1.2.3 interest rate channel Interest rate Channel
The real interest rate is used according to this channel to influence the sensitive spending to the interest rate (interest sensitive spending) . Where theoretical analysis stating that the real interest rate paid all real domestic aggregate demand components to change direction as opposed to change. This analysis stems from looking at the real interest rate as a measure of both: First, the cost of sacrifice in consumption at present versus future consumption or cost of future consumption preference on consumption present, and secondly, for the return of domestic investment. On this basis and assuming the stability of the general price level, the nominal interest rate change is leading to a change in investment spending and real private consumer spending as opposed to the trend. For example, the consequent escalation of the interest rate rise in the savings return (cost comparison for consumption in the time being), which stimulates individuals to reduce consumer preferences, also pays also investors to abandon investment in the least project the ownership and limit their investment projects to those which are not expected to return is the least interest rate. In addition to the escalation of the cost of borrowing to finance the private Alaasthlaki spending and investment spending, the rise of interest rate would also lead to higher borrowing cost for the financing of operating capital and investment in inventories, which imposes on employers more rationalization in their management of their business and operations productivity Astdina what may be laid rise borrowing cost of price increases threaten the competitive positioning of the products of their projects. As for the cost of borrowing reflects the real interest rate also affects the degree of public spending and that may be weaker. The high interest rate climbs of the cost of funding Alaguetradi of government spending and the cost of servicing the public debt, which could force the government to be more modest in its ambitions spending power and more committed to and be guided by the interests of efficiency and adherence to standards in their spending power. In other words, that the increase in the interest rate, under the premise of price stability, as is the explicit declaration of the need to reduce and rationalize real consumer spending, investment and operational purposes. Based on the same logic, the interest rate cut is an explicit call to increase real consumer spending, investment and operational purposes and complacency in streamlining and improving the efficiency of resource use.
2.2.3 Channel asset prices Asset Price Channel
According to the classical theory of asset prices that the original price is equal to the present value of future net revenues expected generated from the original. [34] This means simply that the price of the underlying does not depend only on the path anticipated net flow of revenue in the future, but also on the discount rate used to calculate the present value of those cash flows . Accordingly, the changes in interest rates also affect the stock Calcndhat and stock prices and some real assets Kalakar. And interest rates exercised influence in asset prices Mnkhalal discount rates that are used to calculate future net revenue flows. Accordingly, the price of the underlying varies inversely change the interest rate: the interest rate rises landing his rise and fall. [35] ' [36]
The asset price correlation interest rate gives additional interest rate channel to influence consumer spending to individuals and the private investment spending. On the one hand confirm the economic theory on the existence of a positive relationship between per capita consumption and wealth. [37] The financial assets and real estate are important elements to the wealth of the individual. The correlation of these asset prices inverse relationship to interest rates means that the change in interest rates paid to private consumption as opposed to change direction. On the other hand, financing is one of the key determinants of the expansion in investment and operational capital. [38] As the borrowing is one of the financing channels important, the ability to borrow, ie get a loan, play an important role in determining private investment spending and also in the expansion of the report Operating capital and thus in production. Under current practices and procedures of the banking system, the provision of guarantees collateral commensurate with the requested loan is one of the basic requirements for a loan value. And constitute one of the important assets vocabulary safeguards. Consequently, the ability to obtain loans for the purposes of investment and operational linked to the value of securities and real estate and through that the interest rate. As has been explained previously, the value of these assets vary inversely change the interest rate which means that the relationship between the private and the expansion of production investment spending and interest rate are also counterproductive.
3.2.3 exchange rate channel The Exchange Rate Channel
It reflects the exchange rate for the relative price of the local currency, measured in foreign currency; defined as the amount of local currency needed to buy one unit of foreign currency. It is a tool that the link between domestic prices and world prices, and factories turned under which foreign goods price system to local currency prices. This characteristic of the exchange rate to qualify because plays an important role in economic activity. It is through this function becomes one of the determinants of the general level of prices, which intensifies its effect increasing reliance direct and indirect domestic commodity for viewing on imports. On the one hand, on the other hand, the same function as well give it a pivotal role in determining the relative price structure between domestic goods and foreign goods or the simplest words in the definition of national commodity prices in world markets and the prices of foreign goods in the local markets. In this role contributes to the exchange rate in determining the competitiveness of national production in both foreign markets and domestic markets, or in other words a competitive imports in the domestic market and exports in foreign markets. The devaluation of the exchange rate (ie, improve the value of the dinar against foreign currencies) lowers import prices in local markets and climb export prices in the global markets, which boosts the competitiveness of imported goods in the local markets and weakens the competitiveness of exports in the global Alosouk, and thus encourage change in domestic demand structure in favor of imported goods and pay structure of external demand in foreign markets to change away from the national exports. As that would escalate the exchange rate (ie, reducing the value of the dinar against foreign currencies) to raise the prices of imports in domestic markets and lowers export prices in foreign markets. Such a price shift enhances the competitiveness of locally produced goods in national and foreign markets and weakens the competitiveness of imported goods in national markets and are encouraged to change the domestic demand structure in favor of locally produced goods and pay external demand structure in overseas markets to change for the benefit of national exports. On this basis, it is seen as the high exchange rate as a tool and as an important means to protect national production.
In the economy of a free open the miss any interference by the state or any other agency to limit the free movement of capital is the interest rate one of the important influences in the local currency's exchange rate. [39] theoretical data indicate that the economy has these specifications, the balance requirement imposed on interest rate domestic nominal deposit and stocks and local bonds plus (minus) the proportion of degradation (aspect ratio) in the exchange rate leveled or commensurate, through arbitrage process, with interest rate and foreign nominal deposit stocks and foreign bonds with durations and risks similar and according to the equation the following: [40]
Where crosses
= Domestic nominal interest rate
= Foreign nominal interest rate
= Local Currency Exchange Rate
= Rate of change in the local currency exchange rate
And called on the crossing condition balance equation above his condition equivalent interest rate is encased uncovered interest parity condition . [41]
The investor is expected to check the condition of the above that gets the same return on its investments in different countries, assuming similar to the risks of these investments. That any difference between the ends of the equation (whether this difference arose from a change in interest rates or the percentage change in the exchange rate) would stimulate the flow of capital to the country with the highest interest rate equivalent (ie, adjusted for the change in the exchange rate). Coupled with this flow landing demand for bonds, stocks and reduced both the supply of foreign exchange and cash basis in the country leaving it capital, the high demand for stocks and bonds and the expansion of both supply of foreign exchange and cash basis in the country, which is transmitted to him the capital. Assuming the stability of other factors consequent falling stock and bond prices and rising interest rates and also the escalation of the exchange rate (decline of the local currency value against foreign currencies) in the country extruder for capital and in return the opposite is happening in the host country to the capital, where lead escalating stock and bond prices and falling interest rates, which to the deterioration of the exchange rate (rise of the local currency value against foreign currencies). And it stops the movement of capital between the two countries when restoring interest rates tied to the country / Tkavihma according to the above equation.
The interest rate affects according to the first and second channels on aggregate domestic demand, and thus on the level of economic activity and gross domestic product. While it contributes through the third channel in the formulation of foreign demand for local products and the relative distribution of domestic demand between domestic production and imports in.
Digression important: "impossible trinity The Impossible Trinity "
According to the analytical framework of the previous paragraph, it is impossible to combine the three economic policies: full freedom of capital to move across the border, and the stability of the local currency exchange rate, and the independence of monetary policy. [42] that by any two of them obligation loses the monetary authorities the ability to perform Aiih.vvi under freedom full movement of capital and give priority to stabilizing the exchange rate necessarily lose monetary authorities control over the money supply, also lose their ability to control interest rates where it becomes difficult to determine the interest rates independently of the prevailing interest rates in international markets, and is consistent with it. That forced the central bank to buy and sell foreign currency as required by the requirement to keep a fixed exchange rate forces the monetary authorities change the money supply. As previously Etbianh change the money supply imposes change on local interest rates, assuming the stability of other factors. The appearance of any difference between domestic interest rates and interest rates in the global markets leading to capital outflow from / to the country or by the direction of the difference. This requires maintaining the stability of the exchange rate under these capital flows the central bank to buy or sell foreign exchange which leads, and assuming the stability of other factors, to change the monetary base and the money supply and thus to change interest rates. And finds the central bank was obliged to continue this process until its domestic interest rates rewarded, or rather in this case conformity, [43] with interest rates in the global markets. [44] Based on this analytical framework called the term Trinity impossible Impossible Trinity to denote the impossibility of reconciling the complete freedom of capital to move across the border, and the stability of the local currency exchange rate and an independent monetary policy.
4.2.3 Credit channel quantitative easing Credit Channel and Quantitative Easing
You can monetary policy influence on economic activity through another channel in addition to the channels already mentioned. The use of this channel stems from a number of facts. First, the banking system is practiced an important influence on spending away from interest rate through credit. Valaitman represents one of the important channels of financing. The funding is one of the important determinants of investment spending and operating capital, particularly for small businesses. It is determined by the ability of banks to grant credit the following factors: [45]
Banks and Odaiaha reserves.
Banking controls on the granting of credit, which is the required guarantees from the borrower and financial situation of the most important elements. And it is linked to the financial situation of the borrower the value of assets owned by the bad debt / bad (Almhkukh payment) bad debts to these assets or the space occupied by bad debt within these assets. And the deteriorating financial condition of the borrower at the escalation of interest rates and when entering the economy in recession. When interest rates rise landing many of the assets owned by the borrower value. Bad debt ratio also increased to the assets and banks are shrinking reserves in periods of economic downturn. Consequent validity of these conditions the decline in the willingness of banks to grant loans and provide liquidity.
Secondly, that the practice of politics and the effective interest rate quickly impact on private spending, particularly investment apartment, it is assumed that the fast medium and long-term interest rates, responsiveness and highly sensitive to interest rate policy, interest rates and other short-term. It follows that the low interest rate policy sponsor itself returned wellness of the economy and save it from recession. It is hoped that lead change interest rate policy to change the medium and long-term interest rates in the same direction without time delay important. However, the medium and long-term interest rates in response to the reality of the situation is usually late and very late sometimes come especially for the long-term interest rates, which loses a lot of this policy to be effective in influencing the spending and investment in particular apartment. At the same time, and as we pointed out earlier, change the direction of long-term interest rates have not always kept pace with the direction of change in short-term interest rates. [46]
Third, the above analysis assumes that the interest rate during periods of financial crisis and economic recession have a degree of elevation so that the reduction would stimulate spending and thus pull the economy out of recession. But when the continuation of the economic recession in spite of the approaching interest rate of zero indicates failure of this variable in play any positive role in the lift on the economy from the recession suffered by the loss of any sense to make any further cuts in it. [47]
The three conditions above the monetary authorities pushed to resort to a fourth channel to influence economic activity through monetary policy was agreed to call it the "quantitative easing and credit facility and Credit Easing Quantitative Easing ". According to this window central banks use open market operations to buy public and private securities Long durations. The term quantitative easing the buying public financial assets, and also uses the term credit facility for the purchase of securities. It is hoped these acquisitions: first, the expansion of liquidity at banks and the business sector; and secondly, to secure rapid decline in long-term interest rates, which is expected to achieve through what is generated by the high demand for public and private financial assets long-term rise in prices. [48]
Coupled with the financial crisis and economic recession sharp collapses and financial crises and the spread of bankruptcies and the expansion of the failure to repay the debt in the business sector and domestic sector. Accompanied by a sharp contraction in liquidity in the general economy, especially in the banking system. This situation also pays banking institutions and other lending institutions to shift towards lending hard-line policy and Mgalah reservation and hedging. With the reduction in interest rate to a low level of failure (asymptotic to zero) to lift the economies of some developed countries (such as Japan and the United States) from the influence of the recession felt the monetary authorities of these countries to resort to quantitative easing to trigger economic activity and breathe life into the joints of the economy and putting it back into expansionary path .
Launched monetary authorities in the adoption of quantitative easing and credit facility from two assumptions: First, the expansion of the monetary base associated with quantitative easing leads to improve the lending capacity of the banks, which can be employed directly or indirectly in the financing of the expansion of the productive economic and investment activity, and the breakthrough crisis liquidity and high liquid assets ratio of the total assets of the business sector as a result of the credit facility improves the borrowing capacity of the employers which may motivate them to expand their productive activity and investment. Secondly, the rapid decline in long-term rates, associated with high public and private securities prices long term as a result of escalating demand, reduce the cost of borrowing and raise the value of financial assets and real estate and thus lead to the promotion of the household sector to increase spending consumer and the business sector to expand its activities production and investment. In short, the quantitative easing and credit facility lead to the expansion of the monetary base and credit supply and to reduce the long-term cost of borrowing. But the problem in quantitative easing and credit facility lies in that their employment to increase cash basis and improve the lending and borrowing capacity in itself does not guarantee the actual rise in demand for loans Bamadha different. The expansion of demand for mortgagee loans also improved expectations about future flows of entry and returns, which in turn depends on the actual improvement in demand for various goods and services components. To improve the lending capacity of banks and borrowing capacity to domestic sector and the business sector is one of the necessary conditions for economic recovery, but that in itself is not sufficient to achieve this recovery.
4 Concluding remarks:
Monetary policy is one of the basic vocabulary of the package of economic policies used to manage aggregate demand. And it holds the monetary authorities employ monetary policy tools to achieve the desired economic goals. The mission of the monetary policy tools to make a difference in some or all of the vocabulary of the money supply and interest rates. It is hoped that the impact of the change in the monetary variables moving to real variables and / or price through the stems of the determinants of the money supply channels and through a series of stages connected to each other relations of causality (relations of cause and effects cause and effect relationships ) starting from the financial markets and the end of the components of spending, including the to production and operating rates and prices of goods and services. It follows implicitly of the show that the effectiveness and efficiency of monetary policy in achieving the desired goals depends on a number of factors. Beginning, The effectiveness of monetary policy on the degree of monetary and financial depth of the economy on the degree of development of the financial sector and capital markets in which special and in the degree of diversity of financial investment outlets of securities and derivatives and funds hedging etc ... There is no doubt that a suitable monetary policy requires capabilities professional and specialized eligible adequately able to formulate intelligent monetary policy and on the selection of the most efficient and the most effective tools in the light of prevailing in the country on economic conditions. Monetary policy success in the discharge of its functions and capable of proper administration and implementation of monetary policy prohibitively high professionalism and efficiency of the institutions as supposed. This success also requires the absence of restrictions on the movement of interest rates and the sale and purchase of financial and foreign exchange assets and the existence of measures providing banking institutions refrain from adopting monopolistic practices operations.
(*) consultant in economic policies
(**) Would like a contagious this paper to express deep gratitude to all of Professor conciliator Hassan Mahmoud and Dr. Kamel Mahdi and Dr. Nabil House of Representatives on the notes value do you prefer them when they read the first draft of this paper, and would also like to thank the editorial board of Iraqi economists network on observations . Contagious paper also confirms the full responsibility on all provisions in the paper as the current shortcomings and gaps
Copyright network of Iraqi economists. Permission to quote and re-publication, provided that the source. 11. August 2015
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08/11/2015
Download PDF Abstract require any analysis or sober assessment of monetary policy Wi understand and grasp the consequences of good and justifications for any of the measures of this policy briefing Bmnzawmtha analytical. The aim of this paper ...
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Abstract
Require any analysis or sober assessment of monetary policy Wi understand and grasp the consequences of good and justifications for any of the measures of this policy briefing Bmnzawmtha analytical. This paper aims to provide structure to display Althalilahalnzerah monetary policy. Paper begins by defining the monetary policy and identify key variables, and then move on to display the tools available for this policy to influence these basic monetary variables path. The paper pays special attention to explain the mechanisms by which exercise through which monetary policy variables impact on real variables (such as production and employment) and the price variables. The paper also includes a brief overview of the historical development of monetary policy in developed countries.
1 monetary policy and tools
1.1 monetary policy definition
Monetary policy is defined as " set of actions taken by the monetary authorities to influence the supply and cost of money and credit in order to achieve specific national economic goals that " [1] such as economic growth, full employment of the labor force, and price stability. This cash Altaravellsaash implicitly refers to the existence of two approaches for the management of monetary policy. Monetary authorities can work through the development of a specific target money supply, leaving room for interest rate to move as imposed by market forces; or that the monetary authorities determine or targeting a specific interest rate in advance and then holds the change amount of money supply so as to ensure their conformity with the required quantity when target interest rate or time. [2]
2.1 The role of monetary policy
Monetary policy is seen as one of the macroeconomic policies to manage demand. [3] This policy exercised influence in the economy through the promotion of aggregate demand for goods and services, or through pressure toward reduced, as required by economic conditions. Not only it has the effect of aggregate demand only the level of production, but also extends to the general level of prices. The price of all schools agree that after reaching the full use of the productive energies of the increase in demand in a free and closed economy dissipate entirely in a commensurate increase in the general price level, and assuming the stability of other factors. But the economic schools differ among themselves about the behavior of the general price level when aggregate demand change before the arrival of the economy to make full use of the productive potential of the available points. Of these schools supposed to be sticky and slow change and weak price sensitivity to changes in total spending as long as there are unused productive capacities, assuming wages and other factors stability. This means that it, in light of the wage stability and other Raawaml hypothesis, that the total spending changes translate into significantly, though not fully, to the increase in production, while prices remain quasi-stable, meaning it rises very slowly, to be achieved full exploitation of the productive energies . And it confirms another school that production and prices are changing overall demand change simultaneously and in the same direction, albeit at rates varying change heading towards decreasing for the production and upward for the price, and that the degree of escalation exploit the available production capacities. The degree to approach or move away from the full utilization of productive capacities available one of the important determinants of the degree of response to all of the production and prices of changes in aggregate demand in the short term.
Interest rate provides the link between the economy and the real cash economy, ie between the money market and credit on the one hand, and between the flow of goods and income on the other hand. As will be explained later, [4] contributes to the interest rate in determining the level of gross domestic product through its role as one of the important determinants of the components of domestic aggregate demand. As most of the deals, if not all monetary theories that followed the quantity theory of money as primitive, with the interest rate, in terms of being expresses the cost of the opportunity to keep the money, one of the important variables specific to the demand for Alncodaly along with income and other variables. Assuming the stability of other factors, confirms this theory is that the demand for money varies inversely change the interest rate; or in other words that the demand for money inverse function in the interest rate. In a free market free of restrictions on the demand, the equilibrium interest rate is determined by the intersection of curves on the overall supply of money and the total demand, and that is a price that equals the total demand on the overall supply of money with her.
3.1 money supply and monetary policy
Display is the pivotal variable cash in the monetary policy. The money supply is determined according to the following equation: [5]
Or that
Assuming that
represents where
= Width = cash currency in circulation + deposits in banks excluding the deposits of the central government.
= Monetary base = currency in circulation + bank reserves or reserves banks
= Ratio of currency in circulation to deposits
= = Bank reserve ratio of reserves to deposits ratio in banks
= Money multiplier
It is intended to:
- currency in circulation = currency notes and coins in circulation
- bank reserves or reserves banks = currency in banks cabinets + bank deposits at the central bank.
Analasthaddam the right of any of the equations (1) or (2) above requires a distinction between the legal reserve ratio / mandatory [6] and the percentage of the actual reserve. And there is no justification for the inevitability of a theoretical match Monday at the level of the actual reality. It is the first to determine the ratio decision issued by the monetary authorities. And it indicates the maximum Mgulwbha allows banks to retain deposits compared to what is owned by the reserves. This percentage is legally binding on all banks in the sense that all banks adhere to a minimum. It is clear that it must be the first to resort to the ratio when it is required to identify the money multiplier theory and theoretical cash offer, ie the upper limit for each of the cash money supply multiplier under the legal restriction on the reserve ratio. As indicated by call, the second figure reflects the actual ratio of reserves to the banking actual bank deposits. However, the volume of bank deposits at the level of the actual reality exclusively on the reserves held by banks does not depend only but also depends to a large extent, especially in developed countries, the loans granted by the banks and the investment commitments for these banks. That the Bank has granted a loan means that he is at the same time creating a deposit an equivalent amount in favor of the borrower; as well as, most of the investment commitments of banks financed through the banks to create deposits in amounts equal to the value of investments for the benefit of those concerned banks took over the purchase of investment assets from them. In developed countries, most of the actual money supply is created through the process of creating this bank deposits, that is, through the granting of credit. This was due to the process of creating deposits and credit granting this responsibility to create most of the actual money supply in developed countries; and back to her thus the significant role of banks in determining the actual money supply. [7] It is obvious that the calculation of the actual monetary multiplier and display the actual cash requires the adoption of the second percentage of any reserve ratio actual.
Will be in the rest of this search using the term cash offer to express the actual money supply. Due to the change in money supply theoretical change cash basis, assuming the stability of other factors as illustrated by equation (1), it will be sufficient cash basis the term to refer to: the change in the cash basis and the change in the money supply theoretical output with him.
4.1 monetary policy tools
Central banks of developed countries be able to influence the money supply through a cash basis. These banks and monopoly control over all of the currency in circulation and the statutory reserve ratio, which is determined in the light of banking reserves. On this basis, usually entrusted with the responsibility of implementation of monetary policy central banks. Central banks are based in the implementation of monetary policy, according to any of the two approaches referred to earlier, to employ their ability to control the Alnkadiballju basis to all three categories of tools reprints of selectors display the same criticism: [8]
Open market operations (Open Market Operations)
Discount window service (Discount Window Facility)
Reserve requirements (Reserve Requirements)
1.4.1 Open Market Operations Open Market Operations [9]
Open market operations are the basic tool and the most effective and flexible implementation of monetary policy, specifically to change the cash basis and short-term interest rate, which serves the direction of economic policy. These processes are summarized by the central bank buying and selling of financial assets (for example, but not limited to, securities issued by the Treasury, gold, foreign exchange) through the market and employing cash basis for the settlement of these sales and purchases. The process of buying the central bank securities lead to expansion of the monetary base, while leading to sell financial assets to process the contrary. To settle the procurement process, the Central Bank either pay the amount in cash to the seller or editing the instrument on behalf of the seller and the amount that will find its way after deposited in the banking system to return to the reserve bank account of the seller, or one of the other banks, the central bank. In the case of the central bank to sell financial assets in the market, the sale takes place either through the receipt of the Central Bank of the amount in cash from the buyer settlement or through the instrument deducted at the end of the reserve earnings account of the Bank of the buyer, or to one of the other banks, the central bank. It is clear from equation (1) These operations give way to the possibility of changing the money supply in the same direction of the change in the monetary base. That any expansion or contraction in the monetary base leads to an improvement or deterioration in exchange for the ability of financial institutions to grant loans and credit.
Constitute a public securities (ie, bonds, drafts and notes issued by the Ministry of Finance and Central Bank) primary nerve financial assets that the central bank focuses on dealing in open market transactions. The central bank depends on the purchase and sale of these securities in the open market to make a quick change in the money supply or the interest rate in the short term.
Open market operations also include operations of central banks in buying and selling foreign currency in the local market. These operations, like any sale and purchase of securities handled by central banks, lead to a change cash basis; however, it is distinct from the asset purchases of public securities influence exerted on the local currency exchange rate against foreign currencies any on the amount of the necessary local currency for the purchase price and one unit of foreign currency. [10] Valmarod of foreign exchange in the domestic market is increasing at the central bank, which is owned by the sale of some of this criticism in this market, and decreasing the supply of foreign exchange at the bank purchased from the market. Assuming the stability of other factors, the local currency exchange rate in accordance with the definition adopted by this paper (the amount of local currency needed to buy one unit of foreign currency) drops increase the supply of foreign exchange and rising Ptnaqs. In countries whose economies on the production and export of a limited number of raw materials, oil such as States, take the central bank's operations in the sale and purchase of foreign exchange role may exceed importance of buying and selling public securities (state bonds and remittances and treasury bills and the central bank) in effect on the cash basis Money Supply. With the expansion of globalization and the related surge in foreign trade and in the freedom and speed of movement of capital between countries, began the role of the central bank's operations in the sale and purchase of foreign currency gain increasing importance in determining the course of monetary policy even in developed countries and in the diversified economies of developing countries variables.
2.4.1 discount window service Discount Window Facility [11]
Some states use the term existing facilities (standing facility) to denote this tool. These provide the window to banks and other depository institutions the opportunity to receive from the central bank on short-term loans to address the lack of an emergency short-term liquidity or in the reserves arising bank's internal imbalances or external, for example: falling unexpectedly in a reserve bank without the legal limit, or lack of temporary liquidity resulting from the sudden jump in demand for borrowing and liquidity of the bank, or drop unexpectedly in the flow of liquidity to Almsrv- repayment of loans by the bank clients, Ouan structural defect in the internal financial conditions for banking institution concerned, or for financial confusion in the general economy . Interest on the loan and pay either when repayment of the loan or advance is deducted from the loan amount when the grants. It is clear that the interest rate is called in the second case to the discount rate discount rate) ). and the use of this service somewhat limited what in normal conditions it takes only paramount importance and become almost mandatory during the severe financial crises that are imposed on the central bank to exercise one of its core functions and of being last resort lending (lender of resort are) .
Consequent resort to this service changes in the monetary base. That borrowing from the central bank would broaden the borrower from the bank reserves at the central bank, which shrink again when repayment of the loan. In some cases, the central bank deliberately use this window to change the cash basis in support of open market operations in this area. The establishment of the Central Bank to reduce the discount rate would encourage banks to borrow from it which leads in the case of receiving to expand bank reserves has thus expanded to a cash basis; and the opposite occurs when the central bank decides to increase the discount rate.
3.4.1 reserve requirements Reserve Requirement [12]
As is known, the banking system's ability to create money stems from the fact that depositors rarely withdraw their deposits at once or completely within a short period of time; but that the drag operation is usually performed intermittently, irregularly, and installments of varying amounts, and over time along much What is relatively long. This fact allows banks to continue to expand in the granting of loans and in the investment of its liabilities and its connections through expansion in exchange for their deposits as long as it has enough reserves position to repay the amount of any one of the owners wants deposits withdrawn in cash accounts. I knew the process of money creation according to this mechanism as "partial reserve banking Fractional reserve banking . " [13]
One of the core functions of central banks to protect depositors and the financial system, and in preventing the occurrence of financial crises. And insurance so the central banks determine reserve requirements by issuing legislation which obliges banking institutions to retain a percentage of their existing deposits as a reserve currency reserves is distributed between its deposits in their vaults and maintained by the Central Bank. As is clear from equation (1) the legal reserve ratio or the mandatory is one of the determinants of money multiplier theory, and therefore it provides an additional tool for central banks to influence money supply. However, changing the proportion of legal reserves do not necessarily require immediate and direct change in the size of the reserves of the banking system as a whole or for each Aadaih institution individually, but it definitely will automatically lead to change the upper limit of the legal allowed by the Central Bank of the amounts of deposits that banks can hold it with its of reserves. [14] utilized so that under certain reserves, the upper limit of the total amount of deposits that can be for the banking system as a whole or for each banking institution individually retained by law (ie, without prejudice to the instructions of the Central Bank) is reduced up this percentage drops upside. Assuming the stability of other factors, the change in the legal ceiling for the total size of deposits associated with change in the statutory reserve ratio of the banking system and in the resulting change in the monetary multiplier theoretical mean necessarily change what can be displayed from criticism (ie, the cash offer theoretical).
2 historical development of monetary policy
Monetary policy in the seventies of the last century, focusing on the use of the money supply to influence economic variables and movement so as to ensure the achievement of national economic goals. This focus and was associated with a deep faith in the validity of the quantity theory of money. This theory assumes both the initial old as or as updated (Alfredmanatih, relative to Milton Friedman) that the amount of money directly affect the prices without have little effect on economic activity impact, and that market forces enough to pay the production and operation to their levels equilibrium. [15] and go both schools to the rate of change in prices equal to the rate of change in the money minus the rate of change in production. To reach this conclusion, based on the first school to the stability of money rotation speed and constant factor of which appear in the equation of the theory of the amount of money hypothesis. And rejects the second school Alfredmanatih money rotation speed stability hypothesis, and that the money go to the rotational speed of this is a close relationship function variable demand for money, and that it maintains stability as long as the demand for money maintain the stability function. Assuming the stability of demand for money function get rid of this school that securing price stability does not require monetary policy only change the money supply at a rate equal to or close to production growth rate. [16] and has spread the use of this policy in the advanced industrial countries during the period from the mid-seventies of the century last until the middle of Osmaninyate. [17] The shift came to it as a reaction to the previous Keynesian policies failed to curb inflation and achieve monetary stability. [18] did not pay this policy attention interest rate Blartkzat entirely to achieve the desired goals (reduction of inflation rates and the achievement of price stability) to target a specific path for the money supply, which the central bank takes action to achieve the task. It also has distanced itself from interference in determining the interest rate, but left him full freedom to change and adapt as dictated by the data and economic conditions and personalized supply and demand for money and credit conditions. On this basis, it uses the term "monetary targeting or quantitative or Quantitative Monetary Targeting "to refer to such a policy.
This policy does not have the transmission mechanism and clear except for the presumption that the amount of money a direct impact on prices and that the market forces capable to pay the production and operation to their levels equilibrium. [19] In spite of the success of this policy in containing inflation, but was abandoned in most countries adopted for several reasons. It has resulted in a commitment by the rise of interest rates to very high levels and the entry of the economies of a number of the countries concerned in a steep recession associated with unemployment tyrant. [20] also reinforced a belief among monetary authorities that the extensive and rapid spread of the financial liberation inventory of effective tools to control money supply. [21] as analytical studies confirmed the standard on the instability of the demand for money and the lack of money circulation speed stability function, which points to the collapse of the causal relationship between the amount of money and the general level of prices. This collapse of the relationship has not only led to stripping quantification of the basic theoretical Mrtkzha policy, but also made it difficult to determine the growth rate for the amount of money or lead to ensure price stability. [22]
After the failure of quantification approach took a lot of countries, especially the developed ones, Moving successively since the eighties of the last century to another approach to monetary policy is based on the conceptual framework is different. [23] The second school is characterized by clear Keynesian roots. Monetary policy according to this school perspective is essentially a policy to manage aggregate demand, and that its impact is not confined to only the level of production, but also extends to the general level of prices. This school and put the weight of its monetary policy in the interest rate center, and deal with him as a key tool to help them accomplish their goals. [24] summarized this policy to work to control the path of interest rate short-term to pay for the course and the movement of economic variables college so as to ensure the achievement of its goals with the commissioning authorities Cash / Central Bank the task of changing the money supply so as to ensure check short-term interest rate target in the financial markets. At present monetary policies of many developed and developing countries with interest rate short-term deal as a basic executive its tool.
3 policy transmission mechanism of monetary Monetary Transmission Mechanism
1.3 Definition and stages of the transition mechanism
Exercise monetary policy role in economic life through what are its effect on aggregate demand in the economy. and uses the term mechanism to move to indicate the "mechanism or how they managed to changes determined by the monetary policy in the presentation of the nominal exchange or interest rate short nominal term of the impact on real variables such as production and operation. " [25] and this requires an implicit definition of price stability, or the slow pace of change, so as to ensure the exercise of monetary policy in general and the interest rate is particularly important and influential role in the real economy movement. Under this hypothesis, such as the change in the nominal values of monetary variables (base and supply of cash and the interest rate) necessarily change will be reflected in the real values. But some people find that price stability or slow change hypothesis lose monetary policy and one of the important goals of securing the stability of the domestic commodity prices. They prefer to use the term mechanism transition "refers to the channels that you can monetary policy through which the group, often after long and variable periods and unpredictable Bamadha accurately, the impact on production and prices," [26] or "Alyalamlah which can monetary policy decisions by which from to denote the impact on the economy in general and on the general level of prices in particular. " [27]
Pass the effects of the monetary policy transmission mechanism (ie the impact of the change in the cash basis and interest rate) to the field of production and prices connected Among the series of stages. Starting, changing leads in the monetary base or official interest rate the official interest rate determined by the short-term central bank to change money market conditions as expressed in interest rates and other asset prices and the exchange rate and the general situation of liquidity and credit prices. In the next stage will lead to changes in the conditions of the financial markets this to change in the household sector and the business sector spending in the external sector, and perhaps in the government sector spending as well. According to the analysis of the theory of macroeconomics, the change in aggregate demand components will lead inevitably to the eventual change in the gross domestic product and its structure and in the general level of prices. [28] At any time, the degree of production affected by the moment or price changes spending power depends on several factors including: the surplus space in production capacities and the degree of physical prices for the wife and the form of curves and the marginal productivity of production. [29]
Central Bank plays a pivotal role in the mechanism of the transition administration in guiding tracks for being a monopoly enterprise cash basis on the one hand; and as the body responsible for implementation of monetary policy
On the other hand. When you adopt a monetary policy quantification money supply, the Central Bank to focus on changing the cash basis to resort to monetary policy instruments, and in particular open market operations approach, and to ensure the achievement of the target change in the money supply, which usually determines the light output or total production change; and leaves the Bank the fate of the various Bamadha interest rates to market forces. This means of course that the cash basis according to this approach is not being changed according to changes in the demand for money, and that changes in the demand for money is mainly reflected in pressure on the path of interest rates.
According to the second approach, limited interest in monetary policy and the central bank interest rates in the course of control. To achieve this, it assumes the central bank to set interest rate that gives the Alsmalve-term secured loans with very short (ranging from one night to two weeks). Usually it called the official interest rate this interest rate monetary policy (monetary policy interest rate) , and Acronym policy interest rate. The central bank employ monetary policy tools, in particular the open market operations, to change the cash basis so as to ensure the balance of supply and demand for short-term securities and loans at the specified policy or predetermined target interest rate. That of course means that changes in the demand for money will face action from the central bank to change the money supply so as to ensure the stability of the policy interest rate at the planned level to him. It is hoped that the move change in the policy interest rate to changes in the same direction, but not necessarily at the same rate, the interest rate for loans and deposits of different Bamadha prices through arbitrage mechanism (arbitrage) and which are intended direction of returns on investments with similar risk to equal through a mile of financial capital to go through a time of financial-yielding investment opportunities to lower higher-yielding opportunities and asymmetric risks or after the deduction of the difference in the risk of expected returns. [30] and is expected to respond to short-term interest rates quickly and strongly to changes in interest rate policy. But as a result of the extension of loan periods, the long-term loan interest rates are usually less sensitive than other interest rates to changes in the policy interest rate change and do not necessarily always in the same direction of change in it. According to data expectations for the structure of the time theory of interest rates The Expectation's Theory of the Term Structure of Interest Rates The interest rate long-term is simply the average interest rate short current term interest rates short future term expected in the long future term which necessarily be unclear and fraught with danger. [31] Accordingly, the interest rates for long-term not only what happens to interest rates, short-term at the present time, but also what is happening to expectations about the future path of interest rates, short-term, which represents the prevailing short-term interest rates at the present time one of its determinants and not only specific affected. The change in policy towards a certain rate of interest does not guarantee in itself change the long-term interest rates in the same direction as it is the case for short-term interest rates. Ensure that this requires that the expected path of interest rates short-term future is of a similar direction to the direction of change in interest rate policy. [32]
In order to exercise monetary policy in general, and the interest rate in particular, influential and important role in the real economy movement becomes necessary that prices are either stable or slow change. Under such a situation, the change in the nominal values of monetary variables (base and supply of cash and the interest rate) necessarily change will be reflected in the real values. For this reason, the follow-up to the effects of monetary policy at the level of the actual reality requires a distinction between nominal interest rate and real interest rate. Unlike the nominal interest rate, the real interest rate measures the true cost to the borrower and the real return to the investor after excluding the impact of price change on the value of the cash flows, and is expressed in the following equation: [33]
As it represents:
the real interest rate =
= Nominal interest rate
= the percentage change in the general price level
2.3 channels Jump:
Changes of the interest rate move to aggregate demand components and then to output, employment and prices across three channels:
1.2.3 interest rate channel Interest rate Channel
The real interest rate is used according to this channel to influence the sensitive spending to the interest rate (interest sensitive spending) . Where theoretical analysis stating that the real interest rate paid all real domestic aggregate demand components to change direction as opposed to change. This analysis stems from looking at the real interest rate as a measure of both: First, the cost of sacrifice in consumption at present versus future consumption or cost of future consumption preference on consumption present, and secondly, for the return of domestic investment. On this basis and assuming the stability of the general price level, the nominal interest rate change is leading to a change in investment spending and real private consumer spending as opposed to the trend. For example, the consequent escalation of the interest rate rise in the savings return (cost comparison for consumption in the time being), which stimulates individuals to reduce consumer preferences, also pays also investors to abandon investment in the least project the ownership and limit their investment projects to those which are not expected to return is the least interest rate. In addition to the escalation of the cost of borrowing to finance the private Alaasthlaki spending and investment spending, the rise of interest rate would also lead to higher borrowing cost for the financing of operating capital and investment in inventories, which imposes on employers more rationalization in their management of their business and operations productivity Astdina what may be laid rise borrowing cost of price increases threaten the competitive positioning of the products of their projects. As for the cost of borrowing reflects the real interest rate also affects the degree of public spending and that may be weaker. The high interest rate climbs of the cost of funding Alaguetradi of government spending and the cost of servicing the public debt, which could force the government to be more modest in its ambitions spending power and more committed to and be guided by the interests of efficiency and adherence to standards in their spending power. In other words, that the increase in the interest rate, under the premise of price stability, as is the explicit declaration of the need to reduce and rationalize real consumer spending, investment and operational purposes. Based on the same logic, the interest rate cut is an explicit call to increase real consumer spending, investment and operational purposes and complacency in streamlining and improving the efficiency of resource use.
2.2.3 Channel asset prices Asset Price Channel
According to the classical theory of asset prices that the original price is equal to the present value of future net revenues expected generated from the original. [34] This means simply that the price of the underlying does not depend only on the path anticipated net flow of revenue in the future, but also on the discount rate used to calculate the present value of those cash flows . Accordingly, the changes in interest rates also affect the stock Calcndhat and stock prices and some real assets Kalakar. And interest rates exercised influence in asset prices Mnkhalal discount rates that are used to calculate future net revenue flows. Accordingly, the price of the underlying varies inversely change the interest rate: the interest rate rises landing his rise and fall. [35] ' [36]
The asset price correlation interest rate gives additional interest rate channel to influence consumer spending to individuals and the private investment spending. On the one hand confirm the economic theory on the existence of a positive relationship between per capita consumption and wealth. [37] The financial assets and real estate are important elements to the wealth of the individual. The correlation of these asset prices inverse relationship to interest rates means that the change in interest rates paid to private consumption as opposed to change direction. On the other hand, financing is one of the key determinants of the expansion in investment and operational capital. [38] As the borrowing is one of the financing channels important, the ability to borrow, ie get a loan, play an important role in determining private investment spending and also in the expansion of the report Operating capital and thus in production. Under current practices and procedures of the banking system, the provision of guarantees collateral commensurate with the requested loan is one of the basic requirements for a loan value. And constitute one of the important assets vocabulary safeguards. Consequently, the ability to obtain loans for the purposes of investment and operational linked to the value of securities and real estate and through that the interest rate. As has been explained previously, the value of these assets vary inversely change the interest rate which means that the relationship between the private and the expansion of production investment spending and interest rate are also counterproductive.
3.2.3 exchange rate channel The Exchange Rate Channel
It reflects the exchange rate for the relative price of the local currency, measured in foreign currency; defined as the amount of local currency needed to buy one unit of foreign currency. It is a tool that the link between domestic prices and world prices, and factories turned under which foreign goods price system to local currency prices. This characteristic of the exchange rate to qualify because plays an important role in economic activity. It is through this function becomes one of the determinants of the general level of prices, which intensifies its effect increasing reliance direct and indirect domestic commodity for viewing on imports. On the one hand, on the other hand, the same function as well give it a pivotal role in determining the relative price structure between domestic goods and foreign goods or the simplest words in the definition of national commodity prices in world markets and the prices of foreign goods in the local markets. In this role contributes to the exchange rate in determining the competitiveness of national production in both foreign markets and domestic markets, or in other words a competitive imports in the domestic market and exports in foreign markets. The devaluation of the exchange rate (ie, improve the value of the dinar against foreign currencies) lowers import prices in local markets and climb export prices in the global markets, which boosts the competitiveness of imported goods in the local markets and weakens the competitiveness of exports in the global Alosouk, and thus encourage change in domestic demand structure in favor of imported goods and pay structure of external demand in foreign markets to change away from the national exports. As that would escalate the exchange rate (ie, reducing the value of the dinar against foreign currencies) to raise the prices of imports in domestic markets and lowers export prices in foreign markets. Such a price shift enhances the competitiveness of locally produced goods in national and foreign markets and weakens the competitiveness of imported goods in national markets and are encouraged to change the domestic demand structure in favor of locally produced goods and pay external demand structure in overseas markets to change for the benefit of national exports. On this basis, it is seen as the high exchange rate as a tool and as an important means to protect national production.
In the economy of a free open the miss any interference by the state or any other agency to limit the free movement of capital is the interest rate one of the important influences in the local currency's exchange rate. [39] theoretical data indicate that the economy has these specifications, the balance requirement imposed on interest rate domestic nominal deposit and stocks and local bonds plus (minus) the proportion of degradation (aspect ratio) in the exchange rate leveled or commensurate, through arbitrage process, with interest rate and foreign nominal deposit stocks and foreign bonds with durations and risks similar and according to the equation the following: [40]
Where crosses
= Domestic nominal interest rate
= Foreign nominal interest rate
= Local Currency Exchange Rate
= Rate of change in the local currency exchange rate
And called on the crossing condition balance equation above his condition equivalent interest rate is encased uncovered interest parity condition . [41]
The investor is expected to check the condition of the above that gets the same return on its investments in different countries, assuming similar to the risks of these investments. That any difference between the ends of the equation (whether this difference arose from a change in interest rates or the percentage change in the exchange rate) would stimulate the flow of capital to the country with the highest interest rate equivalent (ie, adjusted for the change in the exchange rate). Coupled with this flow landing demand for bonds, stocks and reduced both the supply of foreign exchange and cash basis in the country leaving it capital, the high demand for stocks and bonds and the expansion of both supply of foreign exchange and cash basis in the country, which is transmitted to him the capital. Assuming the stability of other factors consequent falling stock and bond prices and rising interest rates and also the escalation of the exchange rate (decline of the local currency value against foreign currencies) in the country extruder for capital and in return the opposite is happening in the host country to the capital, where lead escalating stock and bond prices and falling interest rates, which to the deterioration of the exchange rate (rise of the local currency value against foreign currencies). And it stops the movement of capital between the two countries when restoring interest rates tied to the country / Tkavihma according to the above equation.
The interest rate affects according to the first and second channels on aggregate domestic demand, and thus on the level of economic activity and gross domestic product. While it contributes through the third channel in the formulation of foreign demand for local products and the relative distribution of domestic demand between domestic production and imports in.
Digression important: "impossible trinity The Impossible Trinity "
According to the analytical framework of the previous paragraph, it is impossible to combine the three economic policies: full freedom of capital to move across the border, and the stability of the local currency exchange rate, and the independence of monetary policy. [42] that by any two of them obligation loses the monetary authorities the ability to perform Aiih.vvi under freedom full movement of capital and give priority to stabilizing the exchange rate necessarily lose monetary authorities control over the money supply, also lose their ability to control interest rates where it becomes difficult to determine the interest rates independently of the prevailing interest rates in international markets, and is consistent with it. That forced the central bank to buy and sell foreign currency as required by the requirement to keep a fixed exchange rate forces the monetary authorities change the money supply. As previously Etbianh change the money supply imposes change on local interest rates, assuming the stability of other factors. The appearance of any difference between domestic interest rates and interest rates in the global markets leading to capital outflow from / to the country or by the direction of the difference. This requires maintaining the stability of the exchange rate under these capital flows the central bank to buy or sell foreign exchange which leads, and assuming the stability of other factors, to change the monetary base and the money supply and thus to change interest rates. And finds the central bank was obliged to continue this process until its domestic interest rates rewarded, or rather in this case conformity, [43] with interest rates in the global markets. [44] Based on this analytical framework called the term Trinity impossible Impossible Trinity to denote the impossibility of reconciling the complete freedom of capital to move across the border, and the stability of the local currency exchange rate and an independent monetary policy.
4.2.3 Credit channel quantitative easing Credit Channel and Quantitative Easing
You can monetary policy influence on economic activity through another channel in addition to the channels already mentioned. The use of this channel stems from a number of facts. First, the banking system is practiced an important influence on spending away from interest rate through credit. Valaitman represents one of the important channels of financing. The funding is one of the important determinants of investment spending and operating capital, particularly for small businesses. It is determined by the ability of banks to grant credit the following factors: [45]
Banks and Odaiaha reserves.
Banking controls on the granting of credit, which is the required guarantees from the borrower and financial situation of the most important elements. And it is linked to the financial situation of the borrower the value of assets owned by the bad debt / bad (Almhkukh payment) bad debts to these assets or the space occupied by bad debt within these assets. And the deteriorating financial condition of the borrower at the escalation of interest rates and when entering the economy in recession. When interest rates rise landing many of the assets owned by the borrower value. Bad debt ratio also increased to the assets and banks are shrinking reserves in periods of economic downturn. Consequent validity of these conditions the decline in the willingness of banks to grant loans and provide liquidity.
Secondly, that the practice of politics and the effective interest rate quickly impact on private spending, particularly investment apartment, it is assumed that the fast medium and long-term interest rates, responsiveness and highly sensitive to interest rate policy, interest rates and other short-term. It follows that the low interest rate policy sponsor itself returned wellness of the economy and save it from recession. It is hoped that lead change interest rate policy to change the medium and long-term interest rates in the same direction without time delay important. However, the medium and long-term interest rates in response to the reality of the situation is usually late and very late sometimes come especially for the long-term interest rates, which loses a lot of this policy to be effective in influencing the spending and investment in particular apartment. At the same time, and as we pointed out earlier, change the direction of long-term interest rates have not always kept pace with the direction of change in short-term interest rates. [46]
Third, the above analysis assumes that the interest rate during periods of financial crisis and economic recession have a degree of elevation so that the reduction would stimulate spending and thus pull the economy out of recession. But when the continuation of the economic recession in spite of the approaching interest rate of zero indicates failure of this variable in play any positive role in the lift on the economy from the recession suffered by the loss of any sense to make any further cuts in it. [47]
The three conditions above the monetary authorities pushed to resort to a fourth channel to influence economic activity through monetary policy was agreed to call it the "quantitative easing and credit facility and Credit Easing Quantitative Easing ". According to this window central banks use open market operations to buy public and private securities Long durations. The term quantitative easing the buying public financial assets, and also uses the term credit facility for the purchase of securities. It is hoped these acquisitions: first, the expansion of liquidity at banks and the business sector; and secondly, to secure rapid decline in long-term interest rates, which is expected to achieve through what is generated by the high demand for public and private financial assets long-term rise in prices. [48]
Coupled with the financial crisis and economic recession sharp collapses and financial crises and the spread of bankruptcies and the expansion of the failure to repay the debt in the business sector and domestic sector. Accompanied by a sharp contraction in liquidity in the general economy, especially in the banking system. This situation also pays banking institutions and other lending institutions to shift towards lending hard-line policy and Mgalah reservation and hedging. With the reduction in interest rate to a low level of failure (asymptotic to zero) to lift the economies of some developed countries (such as Japan and the United States) from the influence of the recession felt the monetary authorities of these countries to resort to quantitative easing to trigger economic activity and breathe life into the joints of the economy and putting it back into expansionary path .
Launched monetary authorities in the adoption of quantitative easing and credit facility from two assumptions: First, the expansion of the monetary base associated with quantitative easing leads to improve the lending capacity of the banks, which can be employed directly or indirectly in the financing of the expansion of the productive economic and investment activity, and the breakthrough crisis liquidity and high liquid assets ratio of the total assets of the business sector as a result of the credit facility improves the borrowing capacity of the employers which may motivate them to expand their productive activity and investment. Secondly, the rapid decline in long-term rates, associated with high public and private securities prices long term as a result of escalating demand, reduce the cost of borrowing and raise the value of financial assets and real estate and thus lead to the promotion of the household sector to increase spending consumer and the business sector to expand its activities production and investment. In short, the quantitative easing and credit facility lead to the expansion of the monetary base and credit supply and to reduce the long-term cost of borrowing. But the problem in quantitative easing and credit facility lies in that their employment to increase cash basis and improve the lending and borrowing capacity in itself does not guarantee the actual rise in demand for loans Bamadha different. The expansion of demand for mortgagee loans also improved expectations about future flows of entry and returns, which in turn depends on the actual improvement in demand for various goods and services components. To improve the lending capacity of banks and borrowing capacity to domestic sector and the business sector is one of the necessary conditions for economic recovery, but that in itself is not sufficient to achieve this recovery.
4 Concluding remarks:
Monetary policy is one of the basic vocabulary of the package of economic policies used to manage aggregate demand. And it holds the monetary authorities employ monetary policy tools to achieve the desired economic goals. The mission of the monetary policy tools to make a difference in some or all of the vocabulary of the money supply and interest rates. It is hoped that the impact of the change in the monetary variables moving to real variables and / or price through the stems of the determinants of the money supply channels and through a series of stages connected to each other relations of causality (relations of cause and effects cause and effect relationships ) starting from the financial markets and the end of the components of spending, including the to production and operating rates and prices of goods and services. It follows implicitly of the show that the effectiveness and efficiency of monetary policy in achieving the desired goals depends on a number of factors. Beginning, The effectiveness of monetary policy on the degree of monetary and financial depth of the economy on the degree of development of the financial sector and capital markets in which special and in the degree of diversity of financial investment outlets of securities and derivatives and funds hedging etc ... There is no doubt that a suitable monetary policy requires capabilities professional and specialized eligible adequately able to formulate intelligent monetary policy and on the selection of the most efficient and the most effective tools in the light of prevailing in the country on economic conditions. Monetary policy success in the discharge of its functions and capable of proper administration and implementation of monetary policy prohibitively high professionalism and efficiency of the institutions as supposed. This success also requires the absence of restrictions on the movement of interest rates and the sale and purchase of financial and foreign exchange assets and the existence of measures providing banking institutions refrain from adopting monopolistic practices operations.
(*) consultant in economic policies
(**) Would like a contagious this paper to express deep gratitude to all of Professor conciliator Hassan Mahmoud and Dr. Kamel Mahdi and Dr. Nabil House of Representatives on the notes value do you prefer them when they read the first draft of this paper, and would also like to thank the editorial board of Iraqi economists network on observations . Contagious paper also confirms the full responsibility on all provisions in the paper as the current shortcomings and gaps
Copyright network of Iraqi economists. Permission to quote and re-publication, provided that the source. 11. August 2015
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