Introduction
The main reason for the economic analysis of the above article, is to promote the economic capability of monetary policy and if the proposed topic is economically and financially beneficial to the economic growth.
The monetary policy is mainly concerned with the tools taken to regulate the supply of the money, the cost, and the accessibility of credit in the market. Meanwhile, it deals with distribution of credit between the uses and users of borrowing rates of interest.
The economic analysis of the article will give the strength and the weakness of the monetary policy in the domestic capital and the foreign exchange markets. The analysis will compare the effect of the monetary policy and other economies on the impact on the domestic market.
Different monetary tools used to measure the amount of money in circulation will be formulated, to establish which tools are best to use an indicator of economic growth.
According to the article, the unfavorable indicators and the exogenous factors have constantly put upward pressure on the domestic inflation; therefore, posing challenges to the monetary policy going upward. In conclusion, the economic analysis will formulate data in the article and analysis them critically to obtain the best monetary instrument to be implemented in the economy.
The Monetary Policy Concepts and the Theories
Monetary Tools Transmission Method
It refers to the process by which changes in money supply affect the aggregate demand of the economy, an increase in real balances generate portfolio disequilibrium in the economy. These Cause the increase of the interest rate and decline of the aggregate demand; therefore, the people borrow money and hold more than they need.
It causes portfolio investors to try to reduce money holding by buying other assets; thus, changing the prices of the different asset in the economy. The portfolio can help in analyzing the effect of the different asset due to the change in the demand supply in the economy.
Meanwhile, changes of the interest rate affect the aggregate demand in the economy if portfolio imbalances do not lead to significant change in level of interest or if the spending does not respond to change in the rate, then the link between money supply and output will not exist.
Therefore, the monetary policy will expand when portfolio balances lead to a change in interest rate or change in government expenditures so as the output can change. In summary, aggregate demand, portfolio adjustments lead to a change in asset pricing, interest rate spending adjustment to change in interest rate, output change in aggregate demand.
The Crowding Out Effect
The monetary policy and fiscal policy cause the crowding out effect on the economy; the concept is used to analyze the economic situations in the money market. The crowding out effect occurs when interest rate are adjusted leading to impact on the aggregate demand.
The impact affects expansionary fiscal increasing government expenditure and resulting in the rising of income. The economic analysis shows that the rise of interest rate in the economy reduces the level of investment spending and increasing the government spending those crowds out private investment expenditure.
This occurs when expansionary fiscal policy cause rate of the interest rate rise consequently, reducing the private spending. When fiscal policy increases the demand, firms change the level of output by hiring more workers however, this happens in the full employment economy, crowding out occurs through a different mechanism:
The increase in demand will lead to an increase in the price level causing the aggregate demand to move upward along aggregate demand. The raise of the prices reduces real balances in the money stock supply that lead to the enhancement in aggregate demand. The reduction of money supply change the market curve to the left, raising the interest rate until the initial increase in aggregate demand is fully crowded out.
The importance of the monetary policy in the crowding out effect is that it can accommodate fiscal expansionary by increasing or expanding money supply. The raise in the money supply prevents the interest rate from enhancing thus, improving monetary budget deficit in the economy that cause adverse effect on the investment since the interest rate does not change.
The J-curve phenomena
The phenomena are observed when the currency depreciates the value of net export. The theory will help in economic analysis of the above article data to show the effect of the depreciation on the monetary policy. The values of currency keep on changing according to the situation in the money market, it happens under the system of the flexible exchange rate where market force collect any balance deficit in the balance of trade.
The short run elastic of demand of import and export may be small, that means not particularly responsible to the relative forces as compared with the case of economic analysis in the end that is ascertain to be more responsive. The difference between short run and long elastic of the import and export leads to J curve that is a short run worsening in the balance of payment brought about by depreciation.
The policy implication is that flexible exchange rate will not be to eliminate trade deficit in the short run; therefore, the monetary policy and fiscal policy should work together to eliminate the deficit.
The Economic Analysis
The economic analysis will focus on the “Statement of the Monetary Policy Committee” article; the analysis will use the concepts and theories discussed in establishing the weakness and the strength of the monetary policy compared with other determinant of macroeconomic.
Investment Analysis
The investment is the macroeconomic determinants that affect the monetary policy analysis in the market. The article demonstrated that the level of capital accumulation had dropped in the month of august due to the increase of interest rate. From the table below, the portfolio holders reduced the money in holding by purchasing asset in the month of July where buying of the asset was high.
The low purchase was due to high level of the interest and decrease of the money supply consequently, people purchased more assets in the month of July due to low level of interest rate and increase of money supply in the economy. The next equation will help in analyzing different determinants affected by the change of rate of interest in the economy.
Aggregate demand = Y+C+I(r) +G——–1
Where,
Y represents National income (decreased)
C represents the level of consumption (decreased)
I(r) represent the level of investment that decreased due to increase of the rate of interest
G represents the level of Government spending (increased)
Source: Article: 2011-09-22: Statement of the Monetary Policy Committee
The decline of consumption in the second section was due to reduction of the manufacturing output and mining in the second section of the year. The individual opt to release the money in the holding in order to invest in the different projects in the economy due to the low level of interest rate of 5.5% and it is constant to all sections.
Therefore, the individuals have less money to consume in the second section. The increase of the capital accumulation in the economy led to increase in the government spending as shown above in the table above.
The graph below shows clearly that the second section has higher economic growth than the first section but this is not the case because according to the above article the economic growth of the second section has poor economic growth. Only the above macroeconomic indicators do not determine the economic growth of the economy because the economic analysis in the article used other indicator to establish the GDP of the economy.
Other indicators of the macroeconomic that affect the effectiveness of monetary in the economic growth include depreciation of the rand currency against other currencies in the exchange rate market. Meanwhile, the raise of price result into inflation in the economy and affect the monetary policy analysis in the economy. The deficit problem is solved by implication of the monetary tools in the exchange rate market as demonstrated by j curve phenomena.
Source: Article: 2011-09-22: Statement of the Monetary Policy Committee.
The depreciation of the rand poses a potential advantage on the way inflation risk is treated to avoid problems with monetary policy due to much money in circulation. However, the measure of this risk will depend on the scope and persistence of the depreciation trend in the economy. From the table the rand currency was poor in the second section than in the first section these caused the output gap to widen up to 3% in the second section.
Conclusion
The monetary policy is concerned at the potential impact of the current global economic crisis on domestic economic forecast and should be ready to act appropriately when need arise.
The economic analysis on the monetary policy point out the strength and the weakness of the corresponding determinant of the macroeconomic analysis, the GDP growth occurs when increase of the investment asset and increase in the output change in the national income. Meanwhile, the economic analysis establishes the relationship between the monetary policy and the other macroeconomic indicators in the economy.
Bibliography
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Greer, Robert. The Handbook of Inflation Hedging Investments: Enhance Performance and Project your Portfolio from Inflation Risk. New York: McGraw Inc, 2005.
Hetzel, Robert. The Monetary Policy of the Federal Reserve. New York: Cambridge University Press, 2008.
Marcus, Gill. “Statement of the Monetary Policy Committee,” 2011, 1. Web.
Mishkin, Frederics. Monetary Policy Strategy. London: The MIT Press, 2007.