The claim that the central banks is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the
economy. Nothing could be further from the truth. Policymakers are unsure of the future course of the economy and uncertain about the effects of their policy actions.
Dear Olatunji A Shobande,
Yes, I agree fully with this approach to monetary policy shaped by central banks. In my opinion, however, the following issues should be distinguished:
1. The process of cyclical development of the national and global economy in a multi-annual perspective, which does not develop fully objectively and independently, is only coordinated by actively pursued economic policies in individual countries, primarily through fiscal and financial policy. To this should be added the issue of the growing importance of central banking in banking systems since the 1970s and the processes of globalization, deregulation, liberalization of transactions and the operation of financial markets, applied security instruments and credit risk management, including capital markets.
2. The impact of monetary policy on central banking on economic processes, when this policy is used, for example, to stimulate economic growth in the deep recession of the economic cycle of the entire national economy, in other words, as has been used many times in many countries since the 1970s. also after the appearance of the global financial crisis in September 2008. Initially, the Federal Reserve Bank in the USA applied such an interventionist anti-crisis solution, and then the European Central Bank in the European Union applied analogous interventionist anti-crisis programs. thanks to this, restoring the balance in the economies and restoring economic growth has worked more effectively and faster than if these interventionist anti-crisis programs were not applied.
3. Long-term, the same, analogical, similar to the same formula, the same goals and directions of action, such as monetary policy co-ordinated by a large central bank, which is also of international importance due to the importance of the US economy, ie monetary policy shaped by the Bank Federal Reserve in the USA. This has been the case since the 1990s until the global financial crisis in 2008. Consequently, this particular policy of the Federal Reserve bank before 2008 was considered by many economists to be incorrect, too low interest rates were maintained for a long time, which enabled commercial banks to broaden the liberalization of lending policy, which resulted in granting these loans to persons without creditworthiness when there were no reliable borrowers and the home sales market was growing, prices of real estate and securities on stock exchanges continued to grow speculatively, despite the fact that they were highly overvalued.
In connection with the above, in the current economic reality it is not practically justified to assess the dominant models of applied monetary policies in universal, timeless terms, detached from the specific economic conditions of a given country, from a specific moment in the business cycle, from specific standards of the institution's supervision of the financial system, on the specific quality of the effects achieved in the area of the security of the financial system being a derivative of the application of specific solutions and system prudential instruments in the credit risk management process, etc.
On the other hand, it is justified to make objective, scientifically verified assessments of the dominant models of applied monetary policies, but for a specific economic situation, for a given country, for a specific examined and posted financial system functioning in a specific economy, at a specific moment, phase of the economic cycle of the national economy, global situation, specific situation on the capital markets, the level of valuation of securities on stock exchanges, applicable standards and instruments for the security of the financial system, including the effectiveness of supervision institutions over the financial system, including banking, situtions on credit markets, specific scientifically tested and defined standards for the use of bank loans, i.e. level of credit risk for the majority of credit transactions, etc.
Best wishes
THE CENTRAL BANK is what it is: the central body to monitor economic condition in the country. To say that the central bank does not know what it does or that its policy formulation does not reflect the economy is not a valid argument. No central bank works alone, central banks work with other agencies, domestic and international, in its data collection, technical consultation, and policy formulation. At the end, it goes through all steps of decision making process and select the best option that fits the facts at hand. How the economy responds may be influenced by many factors: internal and external. However, the role and function of the central bank in every country works under the guidance of each country's national agency, not just textbook theory.