As usual on Fridays, from Raj Nallari and Breda Griffith's lecture notes.
Gender and Monetary Policy: Introduction
The monetary system in any country comprises of banks and other financial institutions, such as credit unions, micro-credit schemes, and housing societies. In more developed countries, stock markets, investment banks, insurance companies and other institutions also take deposits and provide financial services. Monetary policy instruments are mainly money supply and interest rates, while regulations related to facilitating transactions of payments, assets, debts and credit.
The broad objective of monetary policy conducted by Central Bank of a country is to maintain low inflation (that will also ensure low real interest rates) and stable and realistic exchange rates by managing money supply and setting interest rates. Low inflation, low real interest rates, and realistic exchange rates benefit the poor, while high inflation hampers growth, and the poor are unable to protect their consumption levels. However, moderate inflation in the range of about 20-30% is observed not to have an adverse effect on GDP growth. But, inflation erodes the real incomes and as such, is harmful to the poor, who already have lower incomes. Overvalued exchange rates harm the living standards of the rural poor who are predominantly women who depend upon agricultural exports.
Inflation Targeting. This new approach, which is encouraged by the IMF, is aimed at keeping inflation low and was adopted by over 24 central banks of both developed and emerging markets. The expectation of this approach is that low and stable inflation will be conducive for sustained higher growth and employment. However, as Epstein and Yeldan (2007) showed, there is a tradeoff involved between output and low inflation, the result of which is a ‘sacrifice ratio’ defined as the loss of output or employment associated with a given reduction in price inflation. Inflation targeting countries do not appear to have higher growth rates or lower unemployment rates than non-inflation targeters. Moreover, the expectation that price stability would ultimately lead to higher employment and sustained growth appears not to have materialized. Part of the reason is that global labor supply has been increasing at a rapid rate (large labor migration across countries) and overall slow growth of the world economy is not able to adequate generate sufficient investment and absorb the fast growing labor supply.