Dear Lone

That is an interesting question on table. I suggest that I have to investigate the transmission mechanism and transmission channels of monetary policy to understand the way of transmit the monetary policy into economic factors which include the interest rate channel, the exchange rate channel, the price asset channel, the credit channel and the expectation channel.

In developed countries, there are developed financial markets, the high independent central bank, the high transparenccy in markets, better information database so that they are better in monetary policy conducting.

In developing countries, they face to many puzzles so that monetary policy is less effectiveness.

That is my some ideas, it may not be enough to explain for all picture but i hope that is helpful

Best

Canh

As long as the basis of our policy are the western developed models; the condition of domestic monetary policy may not change. We need indigenous models for our own monetary and fiscal development process. Variables taken into account, its measurement technique matters the most. Moreover, paperwork and ground realities demonstrate significant variances. As a researcher, reliability and validity of the available data is an added challange.

Respected Nguyen Phuc Canh and Pir Qasim Shah

Thanks a lot for your comments, as I have already estimated the monetary condition index and monetary pooicy index and try to link it with the target varibles of the monetary policy and found out that thier is some mismatch, so policy ineffctiveness .

Now the point is that what would be general  the policy suggestion how to impriove the effectiveness. one is ofcourse the reformatinf the mcroeconomic models in connection with the economy. some more commnets from your side if possible 

Dear Lone,

Industrialization is important. For developing countries, if more employments are generated through setting up of more industries in the country than only flow of funds circulated in the system. 

Warm Greetings

 Monetary policy is an excellent policy to control the monetary issues, therefore  this  policy will be keep on changing according to the changing financial scenario of the country  . However monetary policy can’t be effective in achieving its objectives without the coordination of the Fiscal Policy.

 For instance, fiscal policy in India remains static only with annual fiscal exercise and leaving the fate of the economy to the monetary policy all the time.  Thus everyone is believing that the monetary policy only can change the entire economic set up of the economy with its effective instruments. The broad objectives of both macroeconomic policies like monetary and fiscal policies are more or less same, however the scope of the fiscal policy is much more broader than the monetary policy.

 When the developing  economies  are suffering with the problems like Chronic Inflation, Slow Economic Growth, Trade Cycles, Unemployment, Tax Evasion and Money Laundering etc, monetary policy alone can’t maintain  the  economic stability and accelerate the economic growth.

When there is dichotomy in the money market, monetary policy can’t give effective results  . If the financial system is totally controlled without the presence of informal financial system/ unorganized money  market, we can expect effective  results from the monetary policy to some extent.

However, monetary policy can’t do miracles alone, it should be definitely synchronized with fiscal policy for effective results especially in developing economies.

Dr.L.Krishna Veni

Dear Revered Krishnaveni Lankapotu, Ma'am, thanks a lot, for your thoughtful comments,  

Before you answer the question you would have to start thinking what effectiveness means in a system where full employment has been replaced by inflation targets....A system where nominal values are more important that real variables.....The rest is just boring textbook analysis using some nicely behaved theoretical model according to which the market will always be in some phantom equilibrium......think out of the box to find the real answer to what you are asking.....Good luck.....

I absolutely agree with Constantinos Alexiou - the starting point for you should be to answer the question: what do you mean by 'effectiveness of monetary policy'. Usually the effectiveness is related to the target, if there is just one main target (keeping inflation low) there is no problem in assessing the effectiveness (by measuring the gap between the target and the current inflation level), but in case of many objectives, you should probably make a kind of ranking (from the most to the least important).

The problem with effectiveness of monetary policy in developing countries might be using the rule 'one-size-fit-all' for monetary policy and coping the set of tools from developed countries. 

And the last one issue here might be chacking the institutional background of central banks in developing countires: what is the level of their independence, transparency, credibility, accountability and REPUTATION as a by-product of the above mentioned!

I would recommend you a chapter (8) in really great book of H. Davies and D. Green "Banking on the Future. The Fall and Rise of Central Banking", Princeton University Press!

Respected,  Constantinos Alexiou and Anna Matysek-Jędrych thanking you for your valuable comments.

However I would like to share with you that my concern is to understand the effectiveness with respect to inflation. I am also aware regarding the fact that in an economy were the non economic facotrs are playing more important  than economic factors  and with a multiplicty of objectives is it seems vague, I think it still has some policy implications. It is because of the fact despite of all odds the central bank is making use of monetary policy signifcantly to over from inflation  

Thanking You

First, determine your measure of effectiveness - use of various monetary instruments (money supply, interest rates, credit to the private sector, etc) to achieve stable prices, high and accelerated economic growth, low unemployment or low income inequality? Then estimate the impact of the monetary measure on the target variable, adding other complementary explanatory variables in accordance with theoretical and empirical literature. On that basis and through the transmission mechanism, you would be able to determine which monetary policy is ineffective. Recommendations would then flow from the results, taking into account the structure and operations of the economy in question. In doing this, proper coordination of monetary policy with fiscal and debt policies would be important.

The Economic boom of time history that only ever happen in the shortest time was between 1947 and 1950 in the then Federal Republic of German.

This was because their leaders effectively and carefully did the right things and at the right time. Effectiveness of monitory tools work in an environment where the political hand of government leaves the Central Bank to operate or supports it to operate with less interference.

In developed economies for example, they have strong monitory policies which are conscientiously and carefully implemented than political gaming as opposed to the developing countries such as Uganda, DRC Congo, Zimbabwe, Sudan among others.

The above rational gives the central Bank and opportunity to save their economy in time because they are in control than when they are suffocated by their own government.

The other clear way is timely research to get to know what happens elsewhere, how you have been performing, how others have done it etc.

Dear Naveed, please see atteched articles, they are interesting. https://www.imf.org/external/pubs/ft/wp/2011/wp11245.pdf

https://research.stlouisfed.org/wp/2005/2005-048.pdf

Add an answer

https://files.stlouisfed.org/files/htdocs/wp/2005/2005-048.pdf

http://www.economicsdiscussion.net/is-lm-curve-model/effectiveness-of-monetary-policy-and-fiscal-policy/10548

https://www.imf.org/external/pubs/ft/wp/2016/wp16189.pdf

http://www.levyinstitute.org/publications/on-the-effectiveness-of-monetary-policy-and-fiscal-policy

Dear Naveed, We can improve the effectivenes of monetary policy using Friedman's Monetary Rule and Mundell-Fleming's Assignment rule accompanied with appropriate Fiscal policy. But, the developing countries always depends/uses monetary policy to influence their economic activities leads to ineffectiveness. As per my recommendation, if the developing country uses stable money growth associated with appropriate aggregate demand influenced by expansionary fiscal policy can create effective macroeconomic policies for internal as well as external equilibrium.

The economic role of the respective central bank matters. Sometimes, central banks are more about prestige than monetary efficiency. Private and commercial banking should be encouraged, e.g. accessibility of savings banking for everbody.

Politics of money is a wide field and country-specific, despite global finance.

It can't be generalized without considering economic status, forms and situations of country

To improve the effectiveness of monetary policy the BCEAO should be more proactive in determining the stance of fiscal policies, develop financial markets, and liberalize controlled interest rates. The BCEAO is undertaking important reforms in these directions.

Four factors affect the effectiveness of monetary policy, three of which are exogenous, fiscal dominance, dollarization and global risks; one is endogenous, monetary policy framework that integrates strategy, tactics and governance of monetary policy.

Dear Naveed Ahmad Lone,

Several years have passed since the above question was formulated and posted on this discussion forum of the Research Gate portal. This question substantively can refer to a situation that has been going on for several decades in developed countries. Since the 1970s, the importance of central banking in the context of the functioning of both commercial and public financial systems has grown steadily. The scale of the use of monetary policy within the framework of the economic state interventionism conducted by the governments of individual countries has also been growing. The significance of monetary policy conducted by the largest central banks increased, among other things, just before and after the global financial crisis of 2008-09. The instruments of monetary easing applied at that time on a record scale, in a slightly modified formula, were repeated during the 2020 pandemic crisis. Since, due to the over-reaching central banking response applied during the pandemic as part of the interventionist anti-crisis measures, inflation started to rise rapidly in some countries from 2021 onwards, the question formulated above: How to improve the effectiveness of monetary policy? is still relevant. The relevance of this question has increased e.g. in connection with how monetary policy has been conducted for at least 7 years in the central bank in the country where I operate, i.e. monetary policy and the marketing and social communication relating to this policy conducted by the National Bank of Poland. In view of the above, the issue of improving the efficiency and effectiveness of central bank monetary policies has increased in importance in recent years. On the other hand, the importance of this issue may look different and significantly different in individual countries. Depending on whether a country has a national currency or an international currency, the extent of the central bank's monetary policy implementation instruments, the extent to which theoretically independent central banking informally cooperates with the government in the implementation of monetary policy correlated with the government's fiscal policy, the level of reserves and the importance of the central bank in international financial markets, etc., the relevance, efficiency and effectiveness of the monetary policy pursued may vary. Besides, even such elementary issues as the timing of the decision to change the nature of the monetary policy pursued can be an important differentiating factor. For example, when inflation began to rise in many countries in 2021, central banks in different countries decided at different times to change from an interventionist mild monetary policy (based, inter alia, on historically low interest rates) to a successively tightening monetary policy (the start of a series of interest rate increases). In the country in which I operate, economists point out that this decision at the National Bank of Poland was taken too late, as it was taken in October 2021 while inflation in Poland had started to rise six months before this decision was taken. It is highly debatable whether this was a mistake on the part of the analytical teams working on macroeconomic analysis at the central bank or a deliberate action? The President of the NBP also pointed to possible mistakes made in the macroeconomic analyses being prepared during press conferences. The basis for this question is the fact that the increase in inflation was a known and anticipated effect of the financial, anti-crisis aid programmes already applied from April 2020, consisting, inter alia, of non-refundable financial subsidies for enterprises with the condition of maintaining the current level of employment, subsidies granted from the funds of the state financial system, mainly the PLN currency printed by the NBP. This potential and inevitable effect of the applied record lenient monetary policy and public financial aid, which was and is an increase in inflation, was pointed out by economists already in mid-2020. In view of the above, it is reasonable to ask why, in a situation of rising inflation almost from the beginning of 2021, the central bank of the National Bank of Poland did not react until October 2021, while earlier the president of the bank had reassured the public at press conferences that the central bank would not be raising interest rates in the coming months and quarters. As a result of such marketing and social communication by the NBP, many citizens took out mortgages in 2021 taking advantage of the record low interest rates. Now that the interest rates have been raised, e.g. the basic, reference interest rate of the NBP has been raised from the record-low, interventionist level of 0.1 per cent, which was maintained during the 1-3 pandemic wave, to 6.5 per cent, the aforementioned borrowers are now already paying much higher instalments on the loans taken out in 2021. This is just one of many examples of how errors in decision-making, decisions that are often politically determined, lead to the generation of social costs. In view of the above, there is much room for improvement in the functioning of the NBP, including the monetary policy pursued by this central bank. There is also room for improvement in the effectiveness of the monetary policy pursued, as inflation continued to rise despite interest rates having been raised for more than six months. An important issue in the context of these considerations is the fact that bonds available for sale, whose oproc. is indexed to the level of inflation, were not promoted and advertised in the media at all, and new series of bonds with a higher oproc. were introduced only from the middle of this year. Given the lack of full independence of the central bank's monetary policy from the government's fiscal policy, the combination of the above facts may be fully justified. Consequently, the decision to change monetary policy only in October 2021 may not have been the result of accidental errors in the macroeconomic analysis carried out and/or in the management of monetary policy, but, unfortunately, may have been the result of a specific strategy implemented as part of the informal, political cooperation carried out by the central bank with the government.

Regards,

Dariusz

The efficiency of what?

Monetary policies of at least the last twenty years have caused disasters on the planet.