A Review of Is Monetary Policy Overburdened - 1584 Words

The article written by Athanasios Orphanides raises the issue of whether or not governments have too high expectation on monetary policy to achieve long-term goals which can only be accomplished â€Å"by the appropriate policy mix and the cooperation of other public institutions.† Orphanides focused on three major goals burdened on Central banks (CB) which are full employment, fiscal sustainability and financial stability; and developed his arguments using four typical economies, US, Japan, UK and Euro area. He claimed that especially after the GFC, monetary policy is compelled to achieve these goals which are beyond its traditional responsibility with the possible end result of compromising its independence and credibility, thus diminishing†¦show more content†¦The second fiscal policy goal claimed by Orphanides to be burdened on monetary policy is achieving fiscal sustainability, by repairing the huge deficit in the public sector’s balance sheets as a result of excessive government debt prior to the GFC. CBs are burdened to this objective due to â€Å"the lack of political consensus† in many countries, which delayed the adoption of fiscal plans to stimulate the economies in the short run and achieve fiscal sustainability in the long run. Moreover, this isn’t the first time when governments relied on CBs to finance their spending even though the consequence may be as severe as leading to devaluation of their currencies. Despite of the obvious side effects, loosening monetary policy i.e. expanding the supply of liquidity, allowed the governments of US, UK, Japan and Euro areas to borrow from CBs at relatively zero cost and thus eased the financing costs when repaying their previous debts. In addition, â€Å"monetizing the debt may prove politically much easier† because it lets governments put off difficult decisions such as sorting out their medium-term finances and achieve fiscal consolidation. (The Economist, 2012). However, Orphanides indicates that this behaviour could lead to fiscal dominance of monetary policy and at the same time enlarge the existingShow MoreRelatedECON 350 Review Essay ----Athanasios Orphanides article Is Monetary Policy1400 Words   |  6 Pages350 Review Essay ----Athanasios Orphanides article Is Monetary Policy Overburdened ? 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