Inefficiency of Monetary Policies in the U.S and U.K to Address Recent Financial Developments

Essay, 2018

6 Pages, Grade: 1.6



Monetary policy refers to operations of regulatory authorities or central banks aimed at formulating the size as well as the rate of growth of the money supply. Usually, each country establishes a statutory financial institution with legal mandates to develop monetary policy as well as formulating appropriate monetary implementation strategies. The major role of any monetary authority is to control the country’s money supply. The country’s monetary authority is in charge of promoting economic growth and stability. As such, it deals with interest rates matters with the principal objective of establishing stable commodity prices as well as maintaining low rates of unemployment. However, it is important to note that monetary policy is different from the fiscal policy. Monetary policy controls the country’s supply of money whereas fiscal policy deals with taxation, money borrowing as well as government expenditure (Forder 418).

In general, an efficient monetary policy consists of five basic elements: monetary base, reserve requirements, discount window lending, interest rates and the currency board. In brief, monetary base deals open market operations of the Central banks especially through creating efficient deposit mechanisms: deposits in central banks are thus converted to currency; reserve requirements involve regulatory controls over the banks; discount window lending regulate the way in which central banks as well as depository institutions acquire reserves from central banks at a discount rate; interest rates refer to additional charges on loans, savings accounts and other financial assets. Finally, currency board is actually the monetary policy tool which regulates the country’s monetary base. In the United States of America and the United Kingdom, monetary policy is usually executed by the Federal Reserve Systems which are independent from the executive. In other words, central banks operate as special institutions in charge of efficient operation of the financial systems (Bernanke 18). Currently, it is apparent that the recent developments in monetary policy in the US and UK over the last four years have been inadequate to deal with the economic problems.

United States monetary policy (mixed monetary policy) is usually formulated and executed by the United States Federal Reserve Bank of New York. Its principal responsibility is to manipulate the money supply in the United States. Normally, the United States monetary system consists of modern structured institutions which regulate smooth flow of assets. This monetary structure comprise of central bank or the Federal Reserve, treasury and the private commercial banks (Nelson 34).

Federal Reserve Bank of New York maintains the monetary base through creating reliable and efficient mechanisms to control deposits into the central bank as well as regulating the outflow of currencies to other financial institutions. Central banks often rely on treasury securities as the main mechanism of controlling the U.S supply on money. There involved in buying as well as selling treasury securities thus releasing money out from the federal reserve for circulation. By so doing, the Federal Reserve System reduce the monetary base through selling out monetary securities.

On the other hand, the Federal Reserve System increases the monetary base through buying of monetary securities from other monetary institutions such as commercial banks. Through buying back monetary securities, the federal reserve bank of New York exchange securities with hard currency: the received monetary securities increase the monetary base. The second way through which the Federal Reserve Bank of New York manipulates the supply on money is regulation of discount rates. Moreover, the Federal Reserve Bank of New York occasionally adjusts the reserve requirements depending with the prevailing economic demands to ensure efficient supply of money in the United States financial systems (Mc Connell and Brue 674).

The United States government, through the Federal Reserve Bank of New York has established various ways aimed at money creation so as to maintain stable economy. It is estimated that the United States of America has more than $800 billion in circulation throughout the world currently compared to the amount which was in circulation back in 1960’s. There has been a very strong effort by the government over the recent years to ensure that efficient mechanisms are developed to widen the base for money creation worldwide. Clear evidence is shown by the great difference that has occurred since 1959 whereby only $30 billion were in circulation. These remarkable foreign investment changes enable the U.S government to sufficiently address money demands resulting from the ever progressing growth of the country’s production. Usually, money creation process involves various mechanisms and operations which include: core deposits, national debts, interest rates, open market operations, country’s free reserves, and the cost of foreign interest, money supply and distribution of printed cash to all banks (Davies 34).

Even though the Federal Reserve System in the United States of America has been making efforts to ensure efficient transfer of funds through the economy, the monetary policy has proven be inadequate to deal with the current economic challenges facing the U.S economy as well as the global economy in general. In fact, the Federal Reserve admits that there are several uncertainties in the monetary policy decision-making. In addition, there has been a public outcry from the U.S public due to uncontrollably increasing commodity prices as well as the upwards trends of unemployment rates. The major uncertainties in the United States monetary policy include law matters, as well as, the general implementation of the monetary policy (Mc Connell and Brue 576).

To begin with, it appears true that the monetary authority in the U.S is not competent enough to acquire basic information about national production, expenditure and the actual market price trends. Indeed, it is claimed that the position of the U.S economy and growth are not accurately determined. As a result, the implementation of the monetary policy is inefficient making it hard to counter any significant change of economic trends. Moreover, owing to this uncertainty: monetary policy makers usually depend only on economic variable estimates .estimates of economic variables are actually inadequate in monetary policy decision making (Calvo and Reinhart 83).

More often, monetary policy makers design inappropriate approaches to evaluate the most appropriate course of the monetary policy. Fatal misunderstanding of the course of any monetary policy leads to unexpected economic outcome which at some times impact a negative effect on the national economy. Usually, economic crisis are the ultimate outcomes of any unexpected turn of economic trends towards recession. It has also proved difficult for Federal Reserve banks to accurately determine how adjustments on the interest rates influence growth in aggregate demand. Similarly, federal reserves have been unable to measure the growth in potential output with certainty.

Another drawback in the U.S monetary policy is the government’s inability to develop effective measures for achieving stable commodity prices and maximum employment. In addition, there is great uncertainty regarding the monetary policy and the law. The fact of the matter is that, while the objectives of the monetary policy are clearly outlined by the state law, the effective mechanism of implementation is not: thus the implementation procedure is subject to flaws (Calvo and Reinhart 164).

In practice, monetary policy makers have been found to lack up to date information about the prevailing economic and price trends. Currently, there is a very strong criticism against the Federal Reserve due to issues of accountability, opacity and potential market distortion.

The Federal Reserve in the United Kingdom is relatively similar to that of the United States of America. As such, monetary structures in the U.K are more or less the same. However, a great variation may occur in the way monetary policy is implemented (Olivei 121). In addition, the legal regulations governing monetary policy are significantly different. For example, the U.K policy implementation process is less governed by the law.

On the other hand, challenges of the United Kingdom’s Monetary Policy seem to be more than those in the U.S with the Federal Reserve Bank of Boston experiencing severe operational problems.

In conclusion, monetary policy implementation in U.S and the U.K has led economic crisis that has been experienced over the last four years. Monetary authorities have been heavily criticized due to lack effectiveness and adequacy to address the economic challenges facing the entire U.K and U.S. first; unemployment rates in both nations have assumed an upward trend constantly over the recent years. Second, fluctuations in the commodity prices have become the order of the day. Precisely, uncontrolled persistence of unstable economy in the U.S and the U.K gives a clear evidence of the monetary policy inadequacy. Therefore, immediate appropriate economic measures have to be put in place to as a counter response to the economic challenges.


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Inefficiency of Monetary Policies in the U.S and U.K to Address Recent Financial Developments
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Caroline Mutuku (Author), 2018, Inefficiency of Monetary Policies in the U.S and U.K to Address Recent Financial Developments, Munich, GRIN Verlag,


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