Monitory And Fiscal Policy Essay Sample

One of the trends outlined in the essay includes the Federal Reserve which has been challenged by under-spending behaviors. This is due to failure in adopting the Large Scale Asset Purchase Program on their communication policy and with regard to steadily weak economy. To be specific, lack of more open economic targets and clear promises allowed inflation to increase up to two percent. Another issue in mind is the integration of policy and constellation of output and inputs which places risks in communication field.
Another issues arises when the aim to be negligent on inflation which remains unattended as long as Fed still emphasis on taking actions in the context of price stability. Temporary increase in inflation can be considers unnecessary when underrating neither nominal GDP target nor Fed’s Long term inflation target. Thus the failure to fulfill the aim could interfere with degeneration of the economy to pre-recession inclinations. Thus, the Federal Reserve should be in the front line in implementing all the promises and goals of economy.
Another trend that is stipulated is the needs to enhance some coordination between monetary and fiscal policy. Regardless of what can be termed as an abnormality in the 3rd quarter, authorities are already involved in some level of fiscal austerity. The authorities have even efficiently promised to enhance more fiscal strictness. Compromise to the fiscal cliff can also result into further strictness by the authority. Therefore, the most important thing to do is to mitigate the underestimation effects of this strictness. This is due to the fact that the austerity is increasingly prevailing when the multipliers exceeds the expected level at zero limit. As a result, this austerity can be termed as a main aspect in upholding comparative indifferent pace 2013 recovery. It also waste the prospect created by low interest economy. The Federal Reserve however has already placed an aim of buying a stable stream of assets from the financial environment. Instead of explicit coordination, the congress can decide to sell all the debt into that particular stream.
Another significant factor to consider is the potentially negative impacts of sustained zero interest rate system. There should not be assumed that monetary policy does not comprise the distribution effects. Low interest rates are therefore regarded unfavorable to the servers. There is also a concern regarding the alterations of the capital allocation procedure. The excessive risk that is taken in the current period results to a nightmare in the near future. Therefore, it is important to balance positive impacts and the negative impacts. It has been clear that the Federal Reserve is establishing this measure where the aggressive monetary policy might end up weakening the economy in the sense that the interest rates continues to fall. Though they are challenging, different monetary policies can be effective, while tightening policies could be disastrous for the economy.
One more significant policy to consider is the assumption that the economy of US is on a suboptimal course. This has resulted to controversial debate among the global economists. For instance, Federal Reserve president of St. Louis, James Bullard, has many times stated that there is only one course on which their economy is channeled through. However, in such world the fiscal and monetary factions applied are different. This means that monitory policy results only to potentially bigger inflation with minimal effects on the economical growth.
The new Keynesian model can be used to stipulate and integrate all the factors involved the resent US monetary and fiscal policy. The model outlines that a huge negative shock can result into declining the economy at deflationary trap. Amusingly, the agents find their way into trap by developing pessimistic prospect of future economic results. Therefore, agents are therefore able to absorb what can be termed as “new normal” which is critical in decision making that enhances stable equilibrium of the new normal.
The model is consequently customized to accommodate for the nominal wage rigidity. This means that at low equilibrium trap, the stagnation regime has a developed inflation floor. The regime is also characterized by a low level of consumption and output in a way that welfare is potentially greatly worse than the target equilibrium
In conclusion, the direction of monetary policy is considered without even mark down regards about the hazards of the stable zero bound policy. The model used allows not only the acceptance near term growth with regard to monetary policy but also the concern about the sustainability of the policy. The framework can be used to deny the additional austerity on easy terms that it will not bring into normal the interest rate environment. For instance, if the nominal rates were eight percent, then the fiscal stickiness would be used to bring the interest rate environment into normal condition. When the current situation exceeds eight percent, then the fiscal austerity is ineffective. Thus to control the current situation, it could be effective to apply more coordinated mix of monetary and fiscal policy to achieve stability and growth of economy goal.