Discuss the Role Central Banks Have Played in Counteracting

Discuss the persona commutation banks (e. g. federal official, pious platitude of England) have played in counteracting the effects of the monetary crisis. Argue how the monetary insurance constitution mandate talent qualify in the future to avoid such crises. As stated by Buiter (2008) the underlying Bank has three main tasks. These ar (1) the pursuit of macroeconomic stability (2) maintaining fiscal stability and (3) ensuring the proper functioning of the plumbing system of a monetary delivery.The effectiveness of the rudimentary Bank, during the monetary crisis, will be discussed as well as how the primeval Bank could alternate its monetary policies in indian lodge to avoid such a crisis in the future. The main focus will be on the Bank of England (BoE), the European rally Bank (ECB) and the catereral Reserve system of rules (Fed). Each of the of import Banks have opposite objectives when it comes to monetary policy. The BoE concent grade on the target lar geness set by the Chancellor of the Exchequer, which is 2 percent. The ECB has a similar objective although they tooshie set target rising values themselves and it is commonly just under 2 percent.The Fed on the other hand has dickens main aims maximum employment, invariable bells (Buiter 2008). When the crisis hit, the rally Banks make nigh attempts to counteract it. Firstly, they broadened their role as a lender of experience resort. They started to include liquidity support to non-deposit-taking institutions (Blanchard, 2010). This concedeed them to intervene either directly or indirectly with more than(prenominal) companies. This occurred at the start of the crisis where overnight bear on range rose sharp in Europe sending to the ECB responding with a liquidity injection of 94. 8 one million million worth of overnight repos (Cecchetti, 2008).The important Banks went on to drop raise places. The aim of this was to hold banks to receive short-term funding at humiliate interest order as well as reducing the penury for inter-bank loans (Cecchetti 2008). The hope was that lower interest judge would overly encourage spending in the economy. However, This did not solve the problem. This is why the Fed decided to adopt a radical policy where they introduced the Term Auction speediness (TAF). In America the Government debt was move to decline and there was a botheration that the Federal Reserve would have to change their balance sheet management.The TAF allowed banks to bid for reserves at interest rate infra the primary lending rate unattached at the time (Cecchetti 2008). The aim of this was to alleviate pressures in the long-term funding markets. This policy was also adopted by the ECB and BoE. A major(ip) problem which affected Central Banks in the North Atlantic region was that they do mistakes be spring they had not anticipated a pecuniary crisis (Buiter 2008). The Fed cut its interest rates excessively imputable to politic al pressures and financial sphere concerns.This over-reaction of the Fed was partly out-of-pocket to the fact that they are the least free-living of the three central banks and, as a result, felt political and financial sector pressures jumper lead to the over-reaction. If the Fed were to become more independent then such an over-reaction might not occur. One option for Central Banks is to take into account the exchange rate. During the financial crisis the exchange rate was extremely volatile, due to large shifts in cash flows, which lead to large disruptions in activity (Blanchard, 2010).These large fluctuations suit of clothes balance sheets of companies to become unpredictable and kindle damage the trade sector leading to the financial sector becoming more unstable. These fluctuations might be minimized if the Central Banks took exchange rates into consideration as well as the pretentiousness rate when determining monetary policies. Exchange rates preserve, however, not b ecome too stable as this can create salient incentives for contract dollarization (Blanchard, 2010). The financial crisis has shown that the zero backlash nominal interest rates can cause huge problems.Hence, it can be argued that target flash rate could be increase. If the inflation rate were to be increased to 4 percent for example, then this would allow them to lower nominal interest rates to zero and then the real interest rate could be lowered to as low as negative 4 percent . Conventional monetary policy could then ease monetary policy by more than it could with a lower inflation target (Mishkin 2011). However, bringing up the inflation rate could cause problems. It has been found that the economy dust stable if inflation rates are below 3 percent.Once the inflation rate is above this aim populate start to believe that the price take aim is not a credible terminal for the Central Bank any more. This has occurred forwards in the United States leading the the great in flation in the 1970s (Mashkin 2011). ultimately Central Banks could use a price aim target instead of the inflation target they use at the moment. scathe take targeting has a major wellbeing which is that it is an automatic stabilizer. If demand where to drop this would cause a lower price train which would ead to the monetary policy raising the price level back to its target. This would cause a rise in inflation in the short run which would lower interest rates which would stimulate aggregate demand. in that location are, however, some problems when using price level targeting to determine monetary policy. Price level targeting can cause larger fluctuations in output as well as being harder to communicate to the public. The price level target would constantly be ever-changing which is harder to explain the inflation target which remains constant.In conclusion it I have discussed how the Central Banks have tried to counteract the financial crisis. I have found that as well as coming up with innovative ideas such as the TAF to assay to counteract the crisis, they have also made mistakes. There have also been some ideas as to how to change monetary policy, such as price level targeting and raising the inflation rate, in order to counter such a crisis in the future. References Blanchard, O. , dingleAricca, G. , Mauro, P. (2010), Rethinking Macroeconomic polity, IMF Staff postal service Note, http//www. mf. org/external/pubs/ft/spn/2010/spn1003. pdf Cecchetti, S. (2009), Monetary insurance and the Financial Crisis of 2007-2008, mimeo, http//fmwww. bc. edu/ec-j/Sems2008/Cecchetti. pdf Buiter, W. (2008), Central banks and financial crises, word of honor paper series, http//eprints. lse. ac. uk/24438/1/dp619. pdf Mishkin, F. (2011), Monetary Policy Strategy Lessons from the Financial Crisis, NBER Working Papers, https//mms. st-andrews. ac. uk/mms/ staff/2011_2/S2/EC2008/Content/Mishkin%20%282011%29%3A%20Monetary%20Policy%20Strategy/Mishkin2011. pdf