Monetary Policy of Bernanke

Ben Bernanke is current Chairmen of US Federal Reserve and his task is to ensure appropriate monetary policy in order to improve country’s economic and financial performance. Bernanke argues he has to work closely with all members of the Committee because it is the only way to develop monetary policy in such a way that it would fit country’s needs and demands.

Therefore, the paper discusses issues of monetary policy offered by Bernanke as well as examines influence of globalization on overall monetary policy of the country. Actually, Bernanke is interested whether ongoing economic globalization and integration affects US monetary policy. Monetary policy operates in financial and economic environment being strongly affected by integration.

Bernanke notes that monetary policy instead of stabilizing economic and financial situation in the country does little to drive powerful economic forces and to cause structural changes necessary for policy. Bernanke claims that if Federal Reserve wants to develop effective monetary policy, it should, firstly, be fully aware of all factors which are able to affect and determine the overall economic growth, inflation and employments rates in the United States.

Chairman asserts that country’s economy should be open to other countries because openness plays crucial role in monetary policy affecting price stability and sustainable employment within country. Furthermore, economic openness also assists Federal Reserve in meeting congressional mandate.

Bernanke cites analysts who argue that globalization puts obstacles to US monetary policy because it aims at reducing US interest rates of Federal Reserve and asset price. Also globalization diminishes the role of domestic factors affecting inflation process. Nevertheless, Bernanke doesn’t support such idea claiming that he is sure globalization should be implicated to increase effectiveness of monetary policy. Globalization and Monetary Institute was established to study impact of globalization no economy and policy of the country.

Bernanke argues that monetary policy affects above all country’s financial conditions and asset prices and interest rates are under attack. Consequently, changes taken place in financial conditions would affect many households and firms, as well as would affect production, consumption and investment opportunities. Thus, Bernanke states that “the financial environment in which U.S. monetary policy is made has been irrevocably changed by the remarkable increases in the magnitudes of financial flows into and out of the United States”. (Bernanke 2007)

Therefore, he argues that he Federal Reserve should pay more attention to financial stability by controlling federal funds and interest rates. Banks loans should be carefully considered as well. He recommends using open-market operations because due to policy of openness the Federal Reserve would be able to manage constant supply of funds, inter-bank markets. Such policy will keep federal funds close to the targeted rates and international integration of financial markets will not be affected or prevented. Further, Bernanke admits that the Federal Reserve should take proper control over the federal funds rates because they strongly affect short-term dollar nominal interest rates.

Bernanke promotes cooperation of the Federal Reserve with modern central banks because it gives excellent opportunity to conduct monetary policy, to examine economic and financial data obtained from variety of markets, and to apply those data when considering economy and inflation. Bernanke says it is necessary to seek for alternative courses of policy to improve effectiveness of monetary policy and macroeconomic performance of the country.

He recommends developing economic models to guide policymakers and forecasting techniques to ensure sustainable progress. Bernanke assumes that “monetary policymakers must therefore strike a difficult balance –conducting rigorous analysis informed by sound economic theory and empirical methods while keeping an open mind about the many factors, including myriad global influences, at play in a dynamic modern economy like that of the United States”. (Bernanke 2006)

References

Bernanke, Ben. (2007, March 2). Globalization and Monetary Policy. Retrieved April 19, 2007, from http://www.federalreserve.gov/boarddocs/speeches/2007/20070302/

Bernanke, Ben. (2006, February 15). Testimony of Chairmen Ben S. Bernanke. Retrieved April 19, 2007, from http://www.federalreserve.gov/boarddocs/hh/2006/february/testimony.htm

Bernanke: The Yield Curve and Monetary Policy. (2006, March 20). Retrieved April 19, 2007, from http://economistsview.typepad.com/economistsview/2006/03/bernanke_the_yi.html