Category: Monetary Policy

How businesses are established abroad- When developing your business in a foreign market or region, you might consider establishing a more substantial operation. This can be for a variety of reasons such as lower costs, increasing market penetration, improving customer service and complying with government regulations.

Most firms only set up an overseas operation after testing the market. This can be a logical progression from working with an agent or distributor as a company grows its sales. There may be a demand from customers that the exporter has a local presence, and to win government contracts this could actually be a requirement.

In most countries around the world there are government-backed economic development organisations ready and willing to support setting up a more permanent base in the local market. They will be able to help with advice, support and introductions to other companies who have set up similar operations. An example of how businesses are set up abroad could be by franchising, this means that a business agrees to let other businesses run their franchise in another country. Another example could be partnerships, this means that different parties will join together sharing strategies and resources. Another example could be licensing, this means that a company agrees with another business to produce or make their services in other country as a licensee.

ways international businesses are promoted- Each market has its own nuances due to economic, cultural, governmental, and market conditions. It is important to develop a localized strategy and business plan that drives local success while remaining integrated with the overall corporate strategy and objectives. Many global companies try to launch with executives from the parent company or rapidly build a local team from scratch. This is time consuming, risky, and slows time to market. Using proven senior interim executives allows the company to hit the ground running, quickly validate assumptions, and drive key readiness initiatives while the company hires the right senior management team. Based on the product gap analysis, taking the necessary steps such as reviewing government and market regulations to market-ready the products will achieve high-impact product differentiation. Cultural differences, whether it is language, regulations, or customs, requires a firm to be flexible in the policies and procedures implemented in an international operation to ensure employees are engaged and executing on the company’s plans. Companies tend to use local businesses to promote their products when they move to a foreign country because they are not familiar with the culture and language yet, this is to avoid insulting the culture by using offending words on ads.

How international businesses are financed

Foreign exchange systems- this is where currency is converted into other currencies to adapt to their monetary environment. This is helpful for nations so that they know the conversion scale of any country as they can modify it if they have to. For example, £1 is $1.16 which means that any UK companies that operate in the United states have a disadvantage because when they convert their US profit into pounds, the numbers will be lower. However, if UK companies transfer their UK profit into the United State then the numbers will be higher. This is one of the reasons UK companies are not based in the UK, because they gain a higher profit transferring UK profit to foreign country base where the pound is stronger than the local currency.

Bills of lading- bills of lading are archives that are issued by a transporter which points of interest a shipment of stock and gives the title of that shipment to a particular party. Organizations utilize this framework as it helps them to stay informed concerning their merchandise and administrations that are being transported online. This is powerful when organizations exchange universities as it will enhance the communication between nations as they will know the accurate day and time certain merchandise will have arrived to its destination.

Letter of credits- A letter of credit in the business environment is an archive from the bank which ensures that a dealer will get full instalment the length of they comply with certain conditions. On the off chance that a circumstance instalment on the buy, then the bank will cover the outstanding sum for them. This system will be huge in global exchange as banks can support buyers.

Export credits guarantees- Export credit guarantees is basically similar to insurance that protects an exporter against missed payments from importers. This will help to lessen hazards inside of the exporter’s business and it will permit it to keep its costs focused. However, Export credit guarantees can have a negative effect on worldwide exchange as minor markets will not have the capacity to contend with such protected fares.

Trade support by government agencies- This is where agencies are set up by local governments to promote and support trade between countries. This encourages businesses by creating the support required in order for them to trade internationally with ease. This will help businesses to understand the procedures and help them with progress of moving and expanding. For example the UK government helps UK businesses to export and grow internationally and they support overseas businesses to locate and grow in the UK. The government does this by providing services over 100 markets around the world.

Trade associations- A trade association is an industry trade group that is created by the businesses that operate in a particular service industry. Organizations that work in the same industry will have the capacity to cooperate when exchanging internationally as this will create a positive relationship between the organizations and countries. An example of this could be the Brick Industry Association (BIA), British Glass, British Ceramic Confederation (BCC), Chartered Institute of Building (CIOB) or the National Composites Centre. All these trade associations have commun companies working together.

Legal support- Legal support is provided by the authorities that allow businesses to deal with legal issues they may have when trading between countries. This is critical for global exchange as it will prevent exchange limitations from occurring as organizations will be educated on the legal issues that may confront whilst exchanging.

Risk trading internationally

Intellectual Property Risk- This risk involves third parties making unauthorized use of the strategic information of a business or property that affects the value of services or products offered by a business, either directly or indirectly. These risks increase tenfold when doing business overseas because of the difficulties that exist in defeating business rights remotely. This can be avoided by registering the corporate names as well as the trademarks before signing an agreement in any country. It will also be beneficial to constantly modify and improve your services or products to remain ahead of the competition.

Foreign Exchange Risk- This usually concerns the accounts payable and receivable for contracts that are, or soon would be, in force. Foreign exchange rates are in flux constantly. Hence, businesses would be forced to make conversions of the funds generated overseas at rates lower than what is budgeted. This is the reason why it is crucial for businesses to have an appropriate exchange policy in place. This will help in stabilizing profit margins over sales made, mitigating the negative impact of fluctuating rates on sales and procurements, enhancing cash flow control and simplifying domestic and foreign pricing. Businesses need to identify foreign exchange risks to frame an effective policy. It is also essential to recognize the tools available for hedging these risks and carry out a comparative analysis on a regular basis for selecting the best tool available.

Ethics Risks- It is vital to maintain a high ethical standard when offering any product or service in a global market. Companies may face certain questions pertaining to their values at any point while doing international trade. Social conditions and customs vary from country to country, and hence, it is necessary to be especially vigilant. You need to make sure that your foreign suppliers and partners adhere to your values and rules regardless of where they operate from.

Shipping Risks- Whether you are shipping goods abroad or locally, you may face issues such as contamination, seizure, accident, vandalism, theft, loss, and breakage. Before shipping any goods to the buyers, you need to make sure to have sufficient insurance. The International Chamber of Commerce has laid down rules for each party involved in international trade and their responsibilities with regard to shipping risk. It is best to go through the rules and take necessary precautionary steps.

Country and Political Risks- These are risks such as non-tariff trade barriers, central bank exchange regulations, or ban on the sale of certain products in specific countries. For instance, several countries have banned products obtained from threatened animal species. There would be certain things that would never be under your control, such as sanctions, and you must be prepared in order to overcome them. You can find more information on such restrictions by checking the official website of the Ministry of Foreign Affairs and Trade for the specific country.

How to reduce risks when trading internationally

Forward transaction- Foreign exchange forward is an agreement between the buyer and the seller on an exchange rate for a date in the future and the money will change hands until the agreed date when the transaction happens regardless of the market rate. This means you know exactly how much you’ll pay for imports or receive for exports, and you can protect your business when exchange rates turn for the worse.

Futures- Using futures to trade internationally will allow buyers to set standard sizes and maturity dates for a future transaction at a greed rate.

Foreign currency account- this account will allow you to accept payment and pay bills in a foreign currency. You can use multiple accounts if required.

Market order- This allows you to request a foreign exchange conversion for a particular amount and exchange rate. You don’t need to constantly monitor the currency markets as your order will be filled if the market reaches the required level.

Upfront payment- Getting paid cash in advance before shipping the goods is the safest way for you to get paid, but few foreign customers may accept these payment terms. You may be able to negotiate a partial payment upfront with the remainder paid via another method.

Documentary letters of credit – If your customer can produce a letter of credit, they are likely to be a good trade prospect. A letter of credit is a guarantee from their bank that it will pay you on your customer’s behalf as long as you have complied with the agreed terms and your side of the export contract.

Type of insurances for international businesses

Product Liability- This cover protects you in the event that your product causes injury or damage to a person or their property. You could be liable to pay compensation in these circumstances even if you didn’t manufacture the product, and the costs can be severe.

Professional Indemnity- This covers the cost of compensating clients for loss or damage resulting from negligent services or advice provided by a business or an individual.

Marine- If you are exporting a physical product then it needs to move from your factory or warehouse to your customer, and Marine insurance provides cover for this. There are a number of means of covering goods in transit and often this depends on who is made responsible for the goods whilst they are in transit.

Cargo- If you are responsible for the risk of loss or damage while transporting the goods to your customer, then cover will normally be arranged by you. Alternatively, your transport of the goods may be carried out by a specialist third party

Transit- In some cases, the customer will prefer to arrange the transit themselves and if this is the case then they will usually insure. You can either insure single transits, or put an annual policy in place to cover all transits.

Employer’s Liability- in the UK, Employer’s Liability Insurance is a legal requirement for almost all businesses that have employees. It covers your legal liability to employees for injury, illness or death sustained whilst carrying out your business. Although you may not have employees permanently based overseas, exporting can lead to your UK employees having to travel overseas for work.

Public Liability- This covers you for legal liability for injury, illness or death suffered by third parties arising out of your business. All the comments above in relation to Employer’s Liability apply equally to Public Liability. In addition, it is particularly important that your insurance provider has full details of where your staff will be and what kind of work they will be doing.

Contractual issues- It is important that care is taken when entering into contracts for export, and that you have taken legal advice and, if necessary, advice from your insurance provider. There are a number of pitfalls which can be avoided with a little care and attention but which can result in huge uninsured losses if not dealt with.

There were many debates and publications over the lack of efficient quantitative macroeconomic modeling in a period from 1970 to 1990. Famous economists Jordi Gali and Mark Gehtler in their papers try to analyze the reasons relating to the failure of current macroeconomic models of monetary policy and progress the framework for new models. The main indicator of unsuccessful modeling during those years was hesitant projections of the future economy made by lots of central banks. These forecasts were mainly based on traditional and insufficient macroeconomic models.(see Gali/Gehtler(2007)pp.25-45)

According to Gali and Gehtler, one of the main justification of unproductive models was the rigid critiques that addressed to these models by several macroeconomists. Due to having coefficients that are not durable for fluctuations on policy systems and structural alterations, current models were not at their optimum level to handle various difficulties (Sargent(1981) as cited by Gali/Gehtler(2007)). Thus, upcoming kinds of literature such as the New Keynesian model and the real business cycle were thought to be the core part of improvement for these macroeconomic models. Gali claims that, despite the Keynesian model, the real business cycle model is more suitable for a dynamic economy because of its consideration in quantitative ways rather than quality manners.

Gali and Gehtler provided key assumptions for frameworks work efficiently. They think that taking money as a single component must be differentiated with monetary policy. A general way that central banks try to apply for adapting wished real interest rates is regulating the money supply. However, it does not have any direct effect on aggregate demand. It is not deniable that the effectiveness of monetary policy highly connected to private sectors. This means that being attentive to the future expectations of individual households and firms while implementing policy attempts, brings effectiveness with itself. ‘If we can examine the aftermath of such periods, it is thought, we will see the effects of policy unclouded by the effects of other disturbances that might also shift policy'( Sims (1992),pp.978). Gali and Gehtler point out the baseline model that suits the new frameworks. They claim that to make price stability in the economy, firms must be forced to set prices unintentionally. This can be possible only if they face reduces on demand because of monopolistic competition made by policy instruments. In that way, it is possible to influence aggregate demand and aggregate supply which are highly correlated to the chain of monetary policy. Then Gali and Gehtler showed the ways how the model can be used in real-time monetary policy actions by taking into consideration two major features. Premier is the good administration of expectations and proper observing the changes in the economy’s natural equilibrium levels.

They mention that their baseline model is mainly for pedagogical purposes and can somehow not be suitable for implementing it to data. However, recent researches which are targeted to make this model practical work more than enough. In the end, Gali and Gehtler believe that their model shows huge progress despite its remained uncertainty for upcoming challenges in the economy.

The economic decisions of households can have a significant impact on an economy. For example, a decision on the part of households to consume more and to save less can lead to an increase in employment, investment, and ultimately profits. Equally, the investment decisions made by corporations can have an important impact on the real economy and on corporate profits. But individual corporations can rarely affect large economies on their own; the decisions of a single household concerning consumption will have a negligible impact on the wider economy.

By contrast, the decisions made by governments can have an enormous impact on even the largest and most developed of economies for two main reasons. First, the public sectors of most developed economies normally employ a significant proportion of the population, and they are usually responsible for a significant proportion of spending in an economy. Second, governments are also the largest borrowers in world debt markets.

Government policy is ultimately expressed through its borrowing and spending activities. In this reading, we identify and discuss two types of government policy that can affect the macroeconomy and financial markets: monetary policy and fiscal policy.

Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy. By contrast, fiscal policy refers to the government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time. They can be used to accelerate growth when an economy starts to slow or to moderate growth and activity when an economy starts to overheat. In addition, fiscal policy can be used to redistribute income and wealth.

The overarching goal of both monetary and fiscal policy is normally the creation of an economic environment where growth is stable and positive and inflation is stable and low. Crucially, the aim is therefore to steer the underlying economy so that it does not experience economic booms that may be followed by extended periods of low or negative growth and high levels of unemployment. In such a stable economic environment, householders can feel secure in their consumption and saving decisions, while corporations can concentrate on their investment decisions, on making their regular coupon payments to their bond holders and on making profits for their shareholders.

The challenges to achieving this overarching goal are many. Not only are economies frequently buffeted by shocks (such as oil price jumps), but some economists believe that natural cycles in the economy also exist. Moreover, there are plenty of examples from history where government policies—either monetary, fiscal, or both—have exacerbated an economic expansion that eventually led to damaging consequences for the real economy, for financial markets, and for investors.

The balance of the reading is organized as follows. Section 2 provides an introduction to monetary policy and related topics. Section 3 presents fiscal policy. The interactions between monetary policy and fiscal policy are the subject of Section 4. A summary and practice problems conclude the reading.

In Malaysia, such a study has examined its implications through the impact of different types of economic sectors. Domac (1999), Tang (2003) and Ibrahim (2005) among others found that financial variables affect various sectors of the economy including agriculture, mining and quarrying, manufacturing, construction and even services. Kassim and Abdul Manap’s (2008) study focused on the impact of monetary policy variables on seven types of loans, including credit card loans, vehicle purchases, residential and others. These studies are all based on the standard Autoregressive Vector (VAR) approach to determine the impact of monetary policy variables on the sector under study.

Next evidence, Rich (1996) also studied the goals of the financial aggregate as a policy measure in Switzerland. This study has analyzed Switzerland’s monetary policy since it became a public foreign exchange system starting in 1973 following the collapse of the Bretton Woods system. Since 1991, the Swiss central bank has been using a medium-term strategy for 5 years, setting a target for financial growth.

Meanwhile, Davis (1990) has conducted research on aggregate financial targets as a guide to financial policy implementation in the United States. He has used the reduced form of equations to see how various aggregate finances affect US economic growth. The results of this study indicate that all these financial aggregates are used as guidelines for the implementation of financial policies.Developments over the last ten years have shown that ASEAN monetary policy has not produced sufficient results (Adjie, 1998 & Karseno, 1997). Financing budget deficits by raising money will also have an impact on increasing public demand for money.

Mohd. Azlan and Zulkefly in their research on the Relative Price Impact of Monetary Policy Shocks in Malaysia using the autoregressive vector model (SVAR) concluded that the shocks of the Malaysian monetary policy have resulted in varying degrees of response to aggregate inflation. For example, Frankel and Rose (2010) argue that lower interest rates can also encourage oil producing countries to keep oil underground for longer periods of time. This could reduce supply and lead to higher oil prices, with the same effect as other commodity prices.When prices are relative,there is a significant impact of monetary shocks said by Balke and Wynne (2007). In the short run, the share price nearly equalized as prices rose sharply in response to the contractionary shock.

Indicate from research on relationship between economic growth and commodity products by Shairilizwan Taasim and Remali Yusoff (2013) stated that the cocoa and rubber agriculture sector has no short-term impact on the country’s economic growth bur their Johansen’s analysis shows that the cocoa and rubber sectors have a long-term impact on the country’s revenues. The study concludes that cocoa and natural rubber are only effective for the country’s long-term GDP growth. This situation shows that the agricultural industry is still relevant to the national income despite the declining trend of declining production and the increase in labor productivity. Amoro and Shen (2013) using OLS analysis showed that there is a positive relationship between commodity products and exports but that they are very sensitive to global prices and weather conditions. Nonetheless, their impact on the country’s results according to Musila (2004) which examined the general market impact of South Africa on exports from Kenya found that exports were influenced by the number of exports rather than the high prices of an export commodity, which in turn impacted Kenya’s GDP.

In addition, a study by Gerald and Dwyer (2001) also identified the relationship between money and price levels in the United States using quarterly data from 1953 to 1997. The study found that money growth and previous inflation rates were important to predict inflation.Mohd Adib & Siti Sarah (2015) in their paper The Impact of Financial Constraints on Firms’ Productivity in Malaysia , their empirical results show that financial factors have a significant impact on a firm’s productivity. It is found that the firm’s cash flows affect the firm’s productivity. This shows the firm lacks internal funds.This proved how monetary condition affect even a firm not to mention when its related to a country.

According to the findings of the Jusoh study, M. (1990) shows seigniorage plays an important role in enhancing fiscal resilience in Malaysia. Therefore, the presence of seigniorage sources can cause problems in the sector cycle financial. The rationale is that when money supply goes up, the interest rate in the country fell. The fall in interest rates has led to an investment in domestic financial assets become less competitive. This situation may even worsen the country’s capital account as a result from the flow of capital abroad. This will surely cause demand the local currency weakened and led to the value of foreign exchange rates increase.

Energy stocks gained over the tentative deal on border security funding where the markets are trying to acquire more information about the new trade developments and how US-China can find a deal before March-end deadline. Brent was 2 percent up over OPEC production cuts where Saudi Arabia said it would produce by over half a million barrels in a day. On Feb. 13 the prices gained for the third day where the gains were capped over steep declines in the US retail spending almost in a decade raising fears of an economic slowdown.

Weak retail sale data of the US that was one of the biggest drops in over a nine-year till December indicated the economic issues are further increase due to the amplification in the number of Americans filing for unemployment benefits in the last week.

There was the prediction that increases in oil production by the US and slowing global economy can put pressure on crude in 2019 where OPEC decided towards production cuts to regulate prices.

The IEA that coordinates the energy policies estimates the oil demand in the year will remain unchanged at 1.4 million barrels per day. The global supply fell 1 percent to 950,000 bpd, in the month of December 2018 led by the OPEC decline in output even before the actual cut plans were implemented. Higher oil prices can offset lower economic growth. Last year the price of crude grew 20 percent driven by the prospects of a decline in the supply from OPEC, and the leading exporter was Russia. The OPEC Plus group agreed to reduce production by over 1.2 million barrels per day and Saudi Arabia said it will cut production more in March than the deal proposes. IEA expects the non-OPEC production growth to stay at 1.6 million bpd in this year that was 2.6 million bpd in the last year.

Venezuela crisis and Iran related petrodollar clashes

The involuntary decline in OPEC supply over Venezuela and Iran crisis, and low production from Saudi, UAE, and Kuwait, can lead Brent to average at $70 in 2019 as per the Bank of America analysis. The clash over petrodollar and shift in monetary policy of the US Federal Research can cause a fall in interest rates and weaken dollar providing backup for gains in commodities and precious metals. As per the data from CME group traders, there are indications of no further hike in interest rates through January 2020.

Inflation is the key issue where the Fed may have to reverse its position and change its stance of monetary policy where inflation rates have failed to materialize. Due to the increase in trade issues, strengthening the dollar has been one of the reasons for the increase in inflation. A restriction on rate hike can increase pressure on the dollar, especially, against the Euro where the ECB concluded the quantitative easing program to support the European economies.

The goal of financial strategy is to accomplish the ideal extension of economy by encouraging the accessibility of cash supply required for the development. The job of defining financial strategy in India is performed by Reserve Bank of India. It is gone for guaranteeing the accessibility required cash supply for all the genuine financial exercises while it ought not to be accessible in order to make inflationary pressure. The essential point of money related strategy in India is to keep up value strength while remembering the goal of monetary development.

Financial strategy alludes to the means taken by the Reserve Bank of India to control the expense and supply of cash and credit so as to accomplish the financial destinations of the economy. Financial arrangement impacts the supply of cash the expense of cash or the rate of premium and the accessibility of cash. A standout amongst the most vital elements of Reserve Bank is to define and manage a money related arrangement. Such an arrangement alludes to the utilization of instruments of credit control by the Reserve Bank in order to manage the measure of credit creation by the banks. It additionally goes for changing the expense and accessibility of credit so as to impact the dimension of total interest for merchandise and enterprises in the economy.

In India, amid the arranging time frame the essential goal of financial approach has been to meet the necessities of the arranged improvement of the economy.

The essential target of money related approach in the euro territory is value soundness, which infers dodging delayed expansion and emptying. Value dependability is a vital precondition for business assurance and the supportable development of an economy. It underpins speculation and business, while likewise expanding monetary welfare. In the euro region, value security is characterized as an expansion rate of beneath, yet near, 2% over the medium term.

The European Central Bank (ECB) tries to keep up value soundness through changes in financing costs, which influence sparing and venture choices of family units and firms. As a rule, an ascent in loan fees will dishearten spending as higher financing costs make it all the more expensive for monetary specialists to acquire, while empowering sparing. Despite the fact that with a period slack, the subsequent restriction in consumption debilitates total interest and along these lines hoses swelling.

Likewise, since 2009 the ECB has executed a few non-standard financial arrangement measures, including forward direction and resource buy programs, to supplement its standard money related strategy measures, especially when ostensible loan costs moved toward zero.

The essential goal of national banks is to oversee swelling. The second is to decrease joblessness, yet simply after they have controlled swelling.

The U.S. Central bank, in the same way as other national banks, has explicit focuses for these destinations. It looks for a joblessness rate beneath 6.5 percent. The Fed says the normal rate of joblessness is between 4.7 percent and 5.8 percent. It needs the center expansion rate to be between 2 percent and 2.5 percent. It looks for solid monetary development. That is a 2 to 3 percent yearly increment in the country’s total national output.

National banks use contractionary financial approach to decrease swelling. They have numerous apparatuses to do this. The most widely recognized are raising loan costs and selling securities through open market tasks.

They use expansionary fiscal arrangement to bring down joblessness and maintain a strategic distance from subsidence. They lower financing costs, purchase securities from part banks, and utilize different devices to build liquidity.

In India, money related arrangement should work submit glove with the national government’s monetary strategy. It infrequently works along these lines. Government pioneers get re-chose for decreasing assessments or expanding spending. To say it obtusely, it’s tied in with remunerating voters and crusade benefactors. Therefore, financial strategy is typically expansionary. To keep away from expansion in this circumstance, money related approach must be prohibitive.

The Reserve Bank of India (RBI) kept its approach rates unaltered, as was generally expected, and cut its swelling gauge for whatever is left of the money related year, referring to a sharp fall in raw petroleum costs and sustenance ’emptying’.

The national bank likewise acquainted proposition with improve arrangement rate transmission and credit discipline, other than starting an anticipated liquidity infusion throughout the following six quarters, beginning January, through a staged decrease of 25 premise focuses (bps) each quarter in statutory liquidity proportion (SLR).

The six-part fiscal strategy board of trustees (MPC) casted a ballot collectively to keep the arrangement rate unaltered at 6.5%. Considering facilitating of sustenance swelling, unrefined costs and an acknowledging rupee, the MPC cut its expansion projection to 2.7-3.2% from 3.9-4.5% for the second 50% of the current monetary year. It anticipates that expansion should revive to 3.8-4.2% in the main portion of the next year.

The security markets, which translated this as a probability of a future rate cut, saw the 10-year security yield fall more than 13 bps amid exchange. The 10-year government security yield shut down at 7.441%, a dimension keep going seen on 13 April, from its past close of 7.573%.

While the MPC decreased the swelling figure, it held the total national output (GDP) gauge for the present year at 7.4% with dangers to some degree to the drawback, conceivably to represent the credit crush and request shortcoming.

RBI’s new liquidity the executives system consolidates a SLR decrease by 25 bps each quarter until the SLR achieves 18% of net interest and time liabilities (NDTL). While this decrease is probably not going to materially affect local liquidity, it is a piece of the guide to adjust SLR with 100% liquidity inclusion proportion (LCR). LCR is the measure of amazing fluid resources that banks need to set aside to meet transient commitments.

CRR is the measure of assets that banks need to keep with the national bank as an extent of their stores. The Reserve Bank of India (RBI) that borrowers with working capital breaking point of ₹150crore or more should have at any rate 40% of it in working capital advances. In regard of borrowers having total reserve based working capital cutoff of ₹ 150crore or more from the financial framework, a base dimension of ‘credit part’ of 40% will be compelling from April 1, 2019, RBI stated, including that the segment will increment to 60% from 1 July.

Swelling focusing on is a money related arrangement methodology utilized by Central Banks for keeping up value level at a specific dimension or inside a range. It shows the power of value security as the key target of money related arrangement. The contention for value strength originates from the way that rising costs make vulnerabilities in basic leadership, unfavorably influencing reserve funds and empowering theoretical speculations. Swelling focusing on acquires greater consistency and straightforwardness in choosing fiscal strategy. On the off chance that the national banks could guarantee value steadiness, family units and organizations can prepare, arranging compensation based on anticipating low and stable expansion. Different propelled economies including United States, Canada and Australia have been utilizing expansion focusing as a procedure in their money related strategy system. The case for expansion focusing on has been made in India as the nation has been encountering an abnormal state of swelling till as of late.

The Reserve Bank of India and Government of India marked a Monetary Policy Framework Agreement on twentieth February 2015. According to terms of the understanding, the target of financial arrangement structure would be principally to keep up value steadiness, while remembering the goal of development. The money related strategy structure would be worked by the RBI. RBI would plan to contain customer value expansion inside 6 percent by January 2016 and inside 4 percent with a band of (+/ -) 2 percent for every consequent year.

The National bank would be viewed as neglecting to meet the objectives, if retail expansion is more than 6 percent for three sequential quarters from 2015-16 and under 2 percent for three back to back quarters from 2016-17. On the off chance that this occurs, RBI should clarify the purpose behind its inability to meet just as give a time period inside which it will accomplish it. RBI will distribute the working focuses just as working methodology for the financial approach however which the objective for the money related arrangement will be accomplished. The RBI will likewise be required to bring an archive at regular intervals to clarify the wellsprings of swelling and estimate for expansion for next 6-year and a half.

RBI has been utilizing feature (Combined) swelling as the ostensible stay for money related arrangement position from April 2014 onwards.

RBI in its Monetary Policy Report expressed that this adaptable swelling focusing on system incredibly upgrades the validity and adequacy of money related arrangement, and especially, the quest for the expansion focuses on that have been set, which would be the institutional game plan at the transfer of RBI for focusing on expansion.

Looking forward, to meet and keep up the 4.0 percent medium-term, focus next financial, the commitment from sustenance expansion needs to fall strongly by another 150 from the earlier year, that is, from over 2.0 rate directs this monetary toward 0.7 per one year from now.

This is a difficult request amidst blurring effect of the banknote boycott, vulnerability over the current year’s storm, higher least help costs for chosen gatherings and improving country compensation.

We anticipate that sustenance swelling should solidify one year from now and prop the feature expansion to 5 percent from the current year’s evaluated 4.6 percent. Aside from nourishment, the other routinely sticky parts, particularly those with supply holes — wellbeing and training — are probably going to add to expansion.

The center measure has just responded a little to a year ago disinflationary weights. Eminently, the expansion focusing on routine of the national bank is adaptable, henceforth restricting dangers of untimely fixing. The following move past the current year’s the present state of affairs is probably going to be a climb as opposed to additionally cuts.

Other than swelling, the RBI is additionally liable to watch out for liquidity conditions. Liquidity is flush in the wake of demonetization and solid portfolio inflows. The banknote boycott prompted a flood in stores and in this manner a sharp increment in the financial framework’s liquidity. Simultaneously, remote portfolio financial specialists are likewise back after sizeable outpourings. Residential shared assets additionally put emphatically in mid-2017, preceding benefit taking set. To get control over piece of this money excess, the RBI embraced coordinated measures (steady money hold proportion and market adjustment securities) toward the end of last year.

The ongoing move to reestablish money withdrawal points of confinement and regular expense outpourings in March additionally likely encroached on the money heap up. Regardless of these powers, overabundance liquidity is still to the tune of ₹4 trillion, substantially more than the unbiased parity the RBI is alright with.

The global economic crash of financial markets in 2008 resulted in widespread international turmoil. Central Banks were forced into making decisions in relation to their policies and regulations; one being monetary policies. Monetary policies play a huge role in how financial markets fluctuate. The Taylor Rule is a model used to estimate what the interest rates of a countries economy should be and will be, depending on how certain changes in the economies occur. This review will highlight some of the key aspects of the Taylor rule and how it is an integral part of monetary policies.

The financial crisis has had a long-lasting effect on financial markets. Many countries today remain in a state of economic recovery. Ireland is a prime example of how the financial crash had a detrimental effect on a country’s economy. Since 2008, many of the worlds largest economies have made changes to their monetary policies and many people have attempted to conclude what is the optimal set of rules for an efficient monetary policy. Real exchange rates are linked with a set of fundamentals when the nominal interest rate reaction function (Taylor Rule) is applied to monetary policies. (Mark, 2009) There is evidence that the Taylor rule based model is a successful measure of the importance of specific factors in relation to real exchange rate fundamentals (Kim and Park, 2018). Monetary shocks and real exchange rates have a correlated relationship. Many studies have shown that policy shocks implemented within a one-year period have had a desired effect on the real exchange rates (Benigno, 2004). Interest rate smoothing policies and sticky relative pricing help provide an explanation for the correlation between monetary shocks and real exchange rates. In comparison to the work of (Bergin and Feenstra, 2001; Chari et al., 2002; Kollmann, 2001), (Benigno, 2004) shows results “that there is no relationship of proportionality between the time during which prices remain sticky and the persistence of the response of the real exchange rate”. Other results show that serial uncorrelated monetary policies with high nominal price stiffness are not sufficient in generating any form of continuity from monetary shocks.

Many studies that have been carried out over the years attempt to understand why monetary policies that have been put into action do not always follow the Taylor Rule forecasts or recommendations. McCallum’s Rule is another model that challenges the basis of the Taylor Rule. Central banks were at first mainly focused on the increase in money supply they needed at a yearly rate to meet price stability objectives. (Friedman, 1968). McCallum (1988) proposed the monetary base as an instrument and Taylor (1993) proposed the policy rate as an instrument. In comparison McCallum’s Rule does not incorporate real interest rates and output gaps into its model. (Jung, 2018). Although Taylor’s Rule has been a major component of Central bank’s monetary policy positions for many years, (Asso, Kahn, & Leeson, 2010) McCallum’s rule has been proven to be a suitable alternative in assessing Central Bank’s monetary policies (Esanov, Merkl, & de Souza, 2005; Patra and Kapur, 2012; Sun, Gan, & Hu, 2012). The recession forced many policymakers into adopting the use of monetary base in the decision-making process (McCallan’s Rule). Evidence shows that the addition of information perceived from the use of monetary aggregates can aid policymakers in achieving the objective of price stability (Masuch, Nicoletti-Altimari, Rostagno, & Pill, 2003). Additionally, after the financial crash in 2008 policies adopting the approach of money growth outperformed the Taylor Rule and it was strongly recommended that the money growth factor was to be considered by policymakers (Scharnagl, Gerberding, & Seitz, 2010). Although Taylor Rule has been a global standard for many years, it has faced criticism for its limitations. Hofmann & Bogdanova (2012) finds that actual interest rates since the turn of the century have not been at the levels estimated by the Taylor Rule. These results were caused by the increased level of uncertainty in forecasting output and inflation.

Over the year’s policymakers have attempted to gain a better insight into what is the optimal form of Taylor Rule. Roskelley (2016) claims that an augmented form of Taylor Rule gives a better estimation of inflation and output levels instead of a linear or non-linear approach. Taylor (1993) which was a monetary policy guideline for central banks for many years, does not take into account all of the variables that are included in the decision-making process associated with monetary policies. Branch (2014) incorporates the main principles of Taylor Rule along with the ability of policymakers to make calculated estimates based on the information they have access to. Branch calls it “nowcasting” Taylor Rule. With reference to the methods used by Engleberg, Manski, and Williams (2009), Clements (2010), and D’Amico and Orphanides (2008) he finds the average estimate of forecasted uncertainty within the Survey of Professional Forecasters (SPF). The results of the study are quite similar to those of Capistran (2008). Taylor Rule should be adapted to suit “policymakers averse to overpredicting inflation and the output gap.” (Branch, 2014). Siklos & Bohl (2009) views Taylor Rule with the same approach. They believe in forecasted evidence of what inflation and output should be and not just “forward-looking” estimates. Majority of Central Banks apply instruments with variables such as “real exchange rate, equity returns, and housing prices” (Siklos & Bohl, 2009) to establish any idea of the way markets will react to inflation and output rates. Roskelley (2016) findings show that the addition of nowcasting components to the Taylor rule (augmented) displays a clearer view “of linear and non-linear Taylor rules, both in and out-of-sample.” Rudebusch (2002) provides support to this claim that ignoring key information that is available to policymakers will result in inconsistent findings.

A trend associated with emerging countries and their monetary policies in global markets, is the discrete choice model (Nojkovic & Petrovic, 2015). The paper adopts the same discrete choice methodology of Hu and Philips (2004). Evidence suggests that the Central banks of emerging economies will adjust their policies in accordance with how the actual rate differs from the estimated rate in a discrete manner. Frömmel, Garabedian, & Schobert (2011) states that there was a shift from the central banks in these emerging economies from the Taylor rule (focus on interest rates) to a concentration on inflation levels. This shift in strategy provided these economies with a clearer view of the expected rates, than the Taylor Rule approach. Azienman, Hutchison & Noy (2011) analyses the effect of “inflation targeting (IT) in emerging markets”. There is evidence to support IT in emerging markets. The IMF (2005) carried out a study, referencing Ball & Sheridan (2005) that concluded with results showing an average reduction in inflation rates associated with countries engaging in IT. Likewise Gonçalves and Salles (2008), Lin and Ye (2009) came up with corresponding results using different methods. Central banks that focus their attention on IT have witnessed lower averages in inflation rates compared to those that do not. However, Brito & Bystedt (2010) contradict these findings. Too much capital is required to push disinflation. There is no congruent evidence that lowering inflation increases economic growth. Other studies such as Bernanke & Woodford (2005) support these findings, claiming that IT does not contribute to better results.

The preface of the SBP Act, 1956 envisages these goals as ‘while it is important to accommodate the constitution of a State Bank to manage the monetary and credit arrangement of Pakistan and to encourage its development in the best public premium with the end goal of getting monetary strength and more full usage of the country’s useful assets.’

SBP centers around accomplishing monetary steadiness by controlling inflation near its yearly and medium-term targets set by the government. Simultaneously, SBP likewise plans to guarantee monetary steadiness, especially the smooth working of the financial market and the installments framework. Agreement in writing just as nation encounters proposes that cost and monetary dependability work with the accomplishment of supported financial development over the long haul.

The financial approach system includes the decision of a proper middle objective or ostensible anchor to accomplish a definitive objective(s). An ostensible anchor can be a financial variable that moderately rapidly acclimate to changes in money related arrangement instruments and have an anticipated relationship with a definitive strategy destinations. An obvious ostensible anchor assists a national save money with staying away from optional financial strategy, settle time irregularity issue, and improves the probability of accomplishing value dependability objective over a since quite a while ago run.

SBP presently doesn’t have an express moderate objective for any ostensible variable (like M2 development) to accomplish a definitive target of value steadiness. Maybe, SBP has been trying to control swelling by affecting total interest comparative with useful limit through changes in the transient loan fees. That is, the choice about the extent and heading of progress in the arrangement rate is comprehensively founded on the evaluation of by and large macroeconomic conditions specifically on the close term swelling way versus reported expansion target. Consequently, by and by, swelling (and expansion figure) verifiably fills in as ostensible anchor in the current money related strategy approach in Pakistan. Such a way to deal with financial arrangement is near expansion focusing on light system.

Operational objective of SBP’s financial strategy is to keep the overnight currency market repo rate around the Policy (target) Rate. For additional subtleties see the part of Monetary Policy Implementation.

Since May 1999, SBP has been following a market decided conversion scale system in which the worth of Pakistani rupee versus different monetary standards is resolved in the unfamiliar trade market through the market influences of organic market. The market interest circumstance is basically an impression of nation’s Balance of Payments position. The stock of unfamiliar trade mostly comes from sends out, settlements, unfamiliar credits, unfamiliar speculations, and so on, while request emerges because of imports, obligation installments, and so forth In the event that, request is higher than the inventory of unfamiliar cash, the homegrown money will in general devalue and, the other way around.

To control unnecessary unpredictability and to guarantee smooth working of the unfamiliar trade market, the SBP sporadically intercedes in the unfamiliar trade market. Be that as it may, the SBP doesn’t expect to keep the conversion standard at any pre-decided level.

Implementation of the financial approach position, motioned through declaration of the Policy (target) Rate, involves dealing with the everyday liquidity in the currency market with the goal to keep the transient loan fees steady and lined up with the Policy (target) Rate. In particular, as an operational objective SBP targets keeping up the week by week weighted normal short-term repo rate near the Policy (target) Rate . To accomplish this operational objective, SBP basically utilizes OMOs to oversee liquidity in the currency market in a way that there are no inappropriate pressing factors that separates the weighted normal short-term repo rate from the Policy (target) Rate.

In the event that there is a vertical tension on the repo rate, because of deficiency of liquidity in the framework, SBP infuses rupee liquidity in the framework by buying government protections from saves money with the understanding of selling something very similar on an exchange development date – the exchange commonly named as OMO infusion by SBP. Despite what is generally expected, if there is abundance liquidity accessible with the banks, squeezing the overnight repo rate, SBP mops up this overflow liquidity by offering government protections to banks ordinarily with the consent to buy something very similar on the exchange development date. This exchange is for the most part named as OMO mop-up by SBP. Whenever required, SBP likewise directs unfamiliar trade trades in the interbank to affect the market liquidity. Rarely, SBP additionally changes the save prerequisites on the off chance that the liquidity shortage or overabundance is relied upon to remain for a more extended timeframe. At the hour of presenting the unequivocal loan fee passage in August, 2009, the width of the hallway was set at 300 bps. It stayed unaltered at this level until February, 2013 when it was limited to 250 bps. The width has been additionally limited to 200 bps in May 2015.

Financial Policy Decisions are given each substitute month in, July, September, November, January, March and May. They contain brief investigation of financial conditions and reasoning behind the money related arrangement choice. For subtleties see Monetary Policy Statements. SBP imparts its money related strategy position basically through its sites and official statement. Lead representative SBP makes a public interview typically toward the start and center of financial years (July and January) to introduce the money related arrangement position to media as well as transferring the choice on site and official statement. In a bid to improve the correspondence of money related approach and straightforwardness, SBP has begun distributing minutes of the Monetary Policy Committee on its site. After the financial approach declaration, higher administration of SBP makes introductions at different gatherings and offers meetings to print and electronic media to additionally explain its money related arrangement position.

Fiscal policy has had to adapt to the unique implications of the coronavirus. Spending is currently at an all time high of 16.3% of GDP to support crippled industries and a population without income. Policymakers are approaching a crucial moment where they need to avoid austerity while managing national debt; development of contemporary ideas will be key.

Monetary policy has taken inspiration from the introduction of quantitative easing and the drastically low interest rates brought about after the financial crisis of 2008 just being used in a more drastic manner. Monetary policy in the future will depend upon the Bank of England’s forecasts for economic growth and any other economic shocks.

After a 9.9% GDP fall in 2020 the United Kingdom is at a crossroads of utmost significance. Much like the Keynesian post-war approach and the stretch of austerity after the economic collapse of 2008, an economic crisis is often used as a catalyst for change. Thus, the decisions made by the policymakers of today will become a focal point for the country’s direction over the next decade. In this report I will analyse both the fiscal and monetary policy used as a reaction to COVID-19, and then conclude upon what stance the UK should take to ensure a bright recovery.

The impact of COVID-19 has left the current Conservative government in a truly unique position. Whilst most businesses were forced to adapt towards a working-from-home environment, other industries, such as hospitality, airlines and leisure were left completely paralysed. With the alternative being the implosion of many successful UK companies and a complete loss of income to a large proportion of the population; Rishi Sunak was left with no other option but to implement expansionary fiscal policy (increasing government expenditure andor reducing taxes). As shown by the figure below, this led to a discretionary fiscal expansion of 16.3% (proportion of GDP) – a much higher figure in comparison to other developed countries.

However, it must be noted that the most likely reason for such aggressive use of fiscal policy is because other than Spain and Peru, no country’s GDP fell more than the UK’s during 2020.

Milton Friedman once said, Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.

This proves true for the Bank of England’s innovative approach to monetary policy after the Lehman collapse of 2008, particularly due to the introduction of quantitative easing and the severe manipulation of interest rates. Both transmission mechanisms continue to be utilised in this current post pandemic climate, arguably to a more drastic extent.

As you can see on Figure 2, the Bank of England set the interest rate to a previously unseen level of 0.1% in 2020.

This increases AD and inflation in two key ways:

Decreasing the rate of interest leads to a lower rate of return from savings for both consumers and businesses. As a result, agents are encouraged to either invest or consume in the economy inducing a surge of spending in the economy, in turn leading to demand-pull inflation.

A fall in the interest rate also brings about a fall in the cost of borrowing. A low cost of borrowing should incentivise both consumers and businesses to take out more loans, which should then prompt an increase in AD and a slight rise in inflation.

However, both scenarios assume that consumers are willing to spend. In an economic climate filled with uncertainty, agents may instead opt to save as much as possible, even when it may seem rational to consume or invest.

Figure 3 depicts how quantitative easing, a once temporary measure, has steadily increased since 2009 to complement a low interest rate and boost the amount of money flowing round the economy. This occurs when central banks purchase assets, such as government bonds, from private banks to inject cash into the economy, and consequently increase economic activity.

A low interest rate and a sharp increase in quantitative easing across many major global banks (Fed, BoE and ECB) has caused a fall in bond yields and increased the money supply of economies all over the world. As a result, both real estate and the equity market are seeing a huge surge in investment, which is in turn giving economic agents more confidence, and then leading to a rise in consumption (the wealth effect). Whilst this is currently promoting economic growth, policymakers must be aware that continuing in this manner will bring about an unsustainable level of demand-pull inflation and an unmanageable national debt; yet on the other hand implementing contractionary monetary policy will inevitably cause a fall in asset prices, potentially inducing another recession.

Policy Recommendations

I believe policymakers should opt for a more innovative fiscal approach, which can be accomplished by focussing on two key aspects:

Increased Bailout Scrutiny

Why?

As previously stated in the report, the £70 billion used to reduce insolvencies in 2020 led to a 27% decrease when compared to the previous year. Whilst at first glance this may come across as a positive statistic, this reveals that policymakers have financed several unsuccessful firms. The COVID pandemic has brought about a situation whereupon profitable companies in need of support have been put together with businesses which would have most likely become insolvent in 2020.

How?

I believe the CMA should take a more strict and measured approach when dealing with bailouts over the next ten years, as there are much better uses for fiscal expenditure. Through using the capital saved from a reduction of bailouts, the government could instead spend more on infrastructure, which will in turn lead to a rise in GDP (depending on the size of the multiplier) and an increase in living standards. The temporary rise in our already low level of unemployment will eventually be offset by new firms filling the place of the bankrupt companies.

Imposing Bailout Conditions

Why?

A recession gives the government a rare opportunity to align corporate behaviour with long-term societal needs. This was where western economies fell short in 2008, as condition-less bailouts allowed policymakers to flood the world with liquidity without directing it towards any fundamental change. This could have been an opportunity to reform the economy, yet instead most of the money went back into the financial sector. In response to COVID, nations such as France have begun adding conditions onto bailouts by imposing carbon reduction commitments onto corporations (e.g., Airfrance, Renault) and Denmark have denied state aid to any business domiciled in an EU designated tax-haven.

How?

I would advise policymakers to set the objective of reducing carbon emissions, and to then establish a fitting condition when bailing out large corporations over the next decade. Whilst the productivity of firms may be affected in the short term, businesses will eventually innovate and adapt to stay profitable, and a large reduction in negative externalities will ensue.

Conclusion

Whilst many of the measures taken by the government throughout 2020 were devised to combat the unique implications of the COVID pandemic, the general fiscal and monetary policy used was influenced by the blueprint set from the reaction to the financial crisis. Up until 2008, interest rates had never been set so low and quantitative easing was merely a concept in the UK. Since then, interest rates have stayed below 1% and quantitative easing has grown over the past 12 years. With a combination of monetary policy and a new and improved fiscal policy, the UK will be able to grow higher than pre-COVID levels, while also meeting its target to reduce UK emissions at least 68% by 2030 (GOV, 2020).

‘Monetary policy by committee: consensus, chairman dominance, or simple majority?’

Riboni and Ruge-Murcia (2010) develop a model and study the empirical implications of monetary policy-making by a committee under four different protocols, consensus model, agenda-setting model, dictator model, and simple-majority model. All models are estimated by maximum likelihood and the results show that the consensus model is a better fit with the actual data than other alternative models.

There are different aspects of literature focusing on the same area with the research of Riboni and Ruge-Murcia (2010). Firstly, the empirical previous studies on the monetary policy decision by the committees mostly rely on the Median Voter Theorem. For example, Waller (1989, 1992) construct the monetary policy model which has only a single central banker rather than a policy board to make a decision. He analyses the optimal term length for the board members and the committee size and finds that increases in the length of the term of board members and committee size affect the variability and uncertainty in policy to be reduced. However, this model leads to the issues of decision-making from different characteristics of each member of the policy board cannot be explored. Later, there are several kinds of literature that take this issue into account and develop the model that makes assumptions about the characteristics of monetary policy committees. Gerlach-Kristen (2009) examines the heterogenous preferences of monetary committees based on the voting record in the Bank of England. He concludes that external members dissent more frequently than internal members and tend to vote for lower interest rates during economic downturns. Moreover, the results show that the committee members are likely to influence other members in the policy discussion. Faust (1996) assumes that monetary policy committees have different preferences. He develops the model based on the overlapping generations model and concludes that the median voter’s preferences lead to the worse outcome since this median voting protocol might not reflect the optimal interest rates for society. Svensson (2005) develop a monetary policy model under an uncertainty framework. Suppose committee members have different preferences, the members might vote on the relative weight of inflation and output.

However, Riboni and Ruge-Murcia (2010) analyze the impact of the committee’s preferences on monetary policy decisions under different voting procedures in terms of theoretical approach by developing the model under the procedure of each protocol since each voting procedure gives different aspects of the decision-making process. There are few previous studies that focus on different aspects of the decision-making process. Matsen and Roisland (2005) focus on four types of decision rules in the monetary union. The decision rules are as follows: Union rule, Benthamite rule, Majority rule, and Consensus rule. They apply the New Keynesian theoretical framework to analyze the implication of alternative decision-making processes. The results show that the consensus rule gives the highest variability of interest rates compared to alternative rules. For welfare comparison, increasing in loss of welfare is larger under the consensus rule and this consensus rule also provides the most unevenly distributed increase in loss. This suggests that the consensus rules give the interest rate further away from the interest rate preferred by countries. Gerlach-Kristen (2005) also uses the theoretical approach to examine the interest rate setting among three decision procedures; an optimal, averaging, and voting procedure. The model developed in this paper is assumed under the assumption that there is uncertainty in potential output. The results suggest that the voting procedure performs better than other procedures.

In addition, another strand of literature related to Riboni and Ruge-Murcia (2010) in term of empirical implications of monetary policy by committees have been increasing. Chappell et al. (2004) investigate the decision-making in the Federal Open Market Committee (FOMC) of the Federal Reserve. The analysis focuses on the competing pressures of majority rule, consensus building, and the power of the Chairman. They use the median voter as starting point for the analysis and extend the model to capture the role of the chairman and consensus procedure in the monetary decisions. They construct the original data set which contains the preferred interest rates of each committee member and estimate the monetary policy reaction function to calculate the preferred interest rates by using OLS regression. The results claim that the chairman has an enhanced power, approximately 40% to 50% of the voting weight in committee decisions.

However, Riboni and Ruge-Murcia (2010) focus on four types of voting protocol. Stating the consensus model, there are previous studies related to considering this model. Herrera et al. (1996) develop the consensus model under linguistic assessments. The constructed model in this paper is based on linguistic preferences to provide individuals’ opinions and allow the incorporation of human consistency in the decision-making model. Dal-Bo (2006) presents a theory of simple majority rule and consensus rule. He uses the classic monetary model to estimate the results and finds that the optimal supermajority in the consensus model is higher when committee preferences are more heterogenous and the economy is less volatile.

For the agenda-setting model, there is limited literature focusing on this model. First, Romer and Rosenthal (1978) propose the model under the assumption that the chairman has the power to control the proposal to the voters by having monopoly power before the electorate. The voters are forced to choose between the interest rates proposed by the agenda setter and the status quo. They construct a simple model including the expenditure proposal under agenda-setting behavior and claim that controlling the agenda benefits in minimizing the decision cost. Moreover, Eavey and Miller (1984) report laboratory experiments on the agenda-setting model. They test the prediction of the agenda-setting model in a one-dimensional policy space and report the results that the outcome of monetary policy is influenced by agenda control, suggesting the policy outcome produces deviations from interest rates preferred by median members. This is consistent with the results of Riboni and Ruge-Murcia (2010).

The previous literature provides a better understanding in the paper of Riboni and Ruge-Murcia (2010). However, we would like to examine the identifying assumption in the model constructed by Riboni and Ruge-Murcia (2010). The key assumption is that the preference of the monetary committee differs across different members. Each member has their own preferred interest rate which maximizes their utility. From this assumption, they do not consider any constraint in the model. For example, the time constraint and the size of committees’ constraints. As the policy performance of large committees can impact the outcome differs from the small size of committees. Moreover, the policy outcomes under the four voting protocols in the paper might be different if we consider the time constraint. Since the formation of the consensus model is time-consuming, the decisions are difficult to unanimously among large committees under a time constraint. The committee size and meeting duration are sensitive to the voting procedure (Maurin and Vidal 2014). Thus, we should consider these two factors in the modeling framework otherwise the results might be biased.

In addition, the five central banks used in the main paper (Riboni and Ruge-Murcia 2010) have selected committees from both internal and external members. These two types of members could also lead to different outcomes as internal members might have greater experience as central bankers and this could drive the internal-external differences. Hansen et al. (2013) claim that internal members are more hawkish than external members. Thus, considering how many internal and external members were in the meeting could give a better fit of policy outcome under voting protocols compared to the actual data or give different results since the proportion of internal and external committees in each central bank are not equal.

References

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