Money in Monetary Policy

Based on Money in Monetary Policy by (Tomasz Łyziak, 2012), which provided an outline about collected works on the role of money aggregates for conducting monetary policy and efforts to evaluate the role of aggregates in the Polish monetary policy. The article had made comparison with hypothetical and observed arguments which justify or cripple the need for usage of monetary aggregates by central banks, as well as arguments indicating related problems. Besides that, the article also described the most important areas of the discussion on the role of money in monetary policy by presented readings on the information content of money and the use of that information in the Polish central bank's monetary policy between 1998 and 2011.

In the economic theory, there is no agreement on role of money in determining the inflation processes and the significance of money in the monetary policy instrument. This study were attempts to combine achievements of monetarism and the new Keynesian school but many research shows that inadequate evidence or information available where money can be used as an information variable which may simplify the execution of monetary policy (Tomasz Łyziak, 2012).

According to Renee Haltom (Haltom, 2013), there are two methods for central bank to conduct monetary policy which either levelling the amount of money or the value of money. The Federal Reserve can fixed a mark for the quantity of reserves within the banking system, leaving the amount banks pay to borrow those reserves up to economic factor, or fixed the funds rate and supply of reserves the market demands at that rate. The Federal Reserve can use one of these operational targets to impact midway targets that the Fed cannot control directly which ultimately to influence the Fed’s eventual goals of maximum employment and stable, low rate of inflation.

In many ways, monetarism and money may appear to be unrelated to modern monetary policy. Until now, it is the Fed’s direct control over bank reserves that allows it to effect the fed funds rate and wider economic circumstances. In addition, many of the principles primarily supported by monetarists have been so generally believed in both theory and practice that they are no longer connected completely with monetarism. Most important among these principles are allegations that inflation is a monetary phenomenon, that monitoring it should be a main accountability of the central bank, and that there is best at inadequate balance between unemployment and inflation. (Haltom, 2013)

Short-term capital flows may be very impulsive; they react quickly to sudden changes with a variety of factors. This study looks at the probable for using capital controls as a method of decreasing this instability, as well as the economic losses that it can caused. Based on the research that been made by (Montecino, 2010), one of the main problems caused by unrestrained capital movements is their influence on the real exchange rate. An upwelling of capital inflows can cause the appreciation of domestic currency. Increased volatility will caused reduced effectiveness in the country’s tradable goods sector, damage economic expansion and henceforth, hesitation of global prices.