Discuss the Role Central Banks Have Played in Counteracting

Discuss the role cardinal banks (e. g. Fed, Bank of England) have vie in counteracting the effects of the financial crisis. Argue how the monetary insurance authorisation aptitude pitch in the future to avoid such crises. As stated by Buiter (2008) the primordial Bank has three main tasks. These be (1) the pursuit of macroeconomic stability (2) maintaining financial stability and (3) ensuring the proper carrying into action of the plumbing of a monetary economy.The effectiveness of the interchange Bank, during the financial crisis, volition be discussed as well as how the Central Bank could change its monetary policies in mold to avoid such a crisis in the future. The main focus will be on the Bank of England (BoE), the atomic number 63an Central Bank (ECB) and the Federal qualification System (Fed). Each of the Central Banks have different objectives when it comes to monetary policy. The BoE concent judge on the point ostentation devise by the Chancellor of the Exche quer, which is 2 percent. The ECB has a similar objective although they bottom of the inning set target lump themselves and it is usually just under 2 percent.The Fed on the other hand has two main aims maximum employment, stable prices (Buiter 2008). When the crisis hit, the Central Banks made some attempts to counteract it. Firstly, they broadened their role as a lender of last resort. They induceed to include liquidity support to non-deposit-taking institutions (Blanchard, 2010). This leaded them to come in either directly or indirectly with more companies. This occurred at the start of the crisis where overnight interest rate rose sharply in Europe lead-in to the ECB responding with a liquidity injection of 94. 8 billion deserving of overnight repos (Cecchetti, 2008).The Central Banks went on to drop interest range. The aim of this was to allow banks to receive short-term funding at cut down interest grade as well as reducing the demand for inter-bank loans (Cecchetti 2008). The hope was that lower interest judge would also encourage spending in the economy. However, This did non solve the problem. This is why the Fed decided to adopt a late policy where they introduced the Term Auction Facility (TAF). In America the disposal debt was continuing to decline and there was a worry that the Federal Reserve would have to change their dimension sheet management.The TAF allowed banks to bid for reserves at interest rates below the primary lending rate unattached at the time (Cecchetti 2008). The aim of this was to alleviate pressures in the long-term funding markets. This policy was also adopted by the ECB and BoE. A major problem which affect Central Banks in the North Atlantic region was that they made mistakes be give birth they had non anticipated a financial crisis (Buiter 2008). The Fed cut its interest rates excessively due to political pressures and financial sector concerns.This over-reaction of the Fed was partly due to the fact that they are the least independent of the three central banks and, as a result, felt political and financial sector pressures guide to the over-reaction. If the Fed were to become more independent then such an over-reaction might not occur. One option for Central Banks is to take into account the convert rate. During the financial crisis the exchange rate was extremely volatile, due to large shifts in cash flows, which lead to large disruptions in activity (Blanchard, 2010).These large fluctuations cause balance sheets of companies to become unpredictable and can damage the trade sector leading to the financial sector becoming more unstable. These fluctuations might be decrease if the Central Banks took exchange rates into consideration as well as the puffiness rate when determining monetary policies. Exchange rates can, however, not become too stable as this can create greater incentives for contract dollarization (Blanchard, 2010). The financial crisis has shown that the zero boun d nominal interest rates can cause huge problems.Hence, it can be argued that target inflation rate could be increased. If the inflation rate were to be increased to 4 percent for example, then this would allow them to lower nominal interest rates to zero and then the real interest rate could be move to as low as negative 4 percent . effected monetary policy could then ease monetary policy by more than it could with a lower inflation target (Mishkin 2011). However, face lifting the inflation rate could cause problems. It has been implant that the economy remains stable if inflation rates are below 3 percent.Once the inflation rate is supra this aim people start to believe that the price aim is not a credible goal for the Central Bank any more. This has occurred forward in the United States leading the the great inflation in the seventies (Mashkin 2011). Lastly Central Banks could use a price level target instead of the inflation target they use at the moment. Price level targ eting has a major benefit which is that it is an automatic stabilizer. If demand where to drop this would cause a lower price level which would ead to the monetary policy raising the price level back to its target. This would cause a rise in inflation in the short run which would lower interest rates which would stimulate aggregate demand. thither are, however, some problems when using price level targeting to determine monetary policy. Price level targeting can cause larger fluctuations in output as well as being harder to choke to the public. The price level target would constantly be changing which is harder to condone the inflation target which remains constant.In conclusion it I have discussed how the Central Banks have tried to counteract the financial crisis. I have found that as well as coming up with innovative ideas such as the TAF to try to counteract the crisis, they have also made mistakes. There have also been some ideas as to how to change monetary policy, much(pr enominal) as price level targeting and raising the inflation rate, in order to prevent such a crisis in the future. References Blanchard, O. , DellAricca, G. , Mauro, P. (2010), Rethinking Macroeconomic polity, IMF Staff Position Note, http//www. mf. org/external/pubs/ft/spn/2010/spn1003. pdf Cecchetti, S. (2009), Monetary indemnity and the financial Crisis of 2007-2008, mimeo, http//fmwww. bc. edu/ec-j/Sems2008/Cecchetti. pdf Buiter, W. (2008), Central banks and financial crises, discussion paper series, http//eprints. lse. ac. uk/24438/1/dp619. pdf Mishkin, F. (2011), Monetary Policy Strategy Lessons from the Financial Crisis, NBER Working Papers, https//mms. st-andrews. ac. uk/mms/module/2011_2/S2/EC2008/Content/Mishkin%20%282011%29%3A%20Monetary%20Policy%20Strategy/Mishkin2011. pdf