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Transmission Mechanism of Monetary Policy in Developing Countries (Essay Sample)

Write a 1,500-word essay. Pick from one of the following topics. The piece should demonstrate the student's ability to communicate, at length and in-depth, concepts and information relevant to the course. Essay titles 1. Explain the transmission mechanism of monetary policy with particular reference to developing countries. http://www(dot)cambridge(dot)org/catalogue/catalogue.asp?isbn=9780521813464&ss=ex 2. Which are the main monetary policy options for developing countries? 3. Describe the roots of financial crises during the 1990s and the role that international financial institutions play in resolving them. 4. Discuss exchange rate policies in developing countries. http://www(dot)imf(dot)org/External/Pubs/FT/staffp/2008/03/fischer.htm source..
Transmission Mechanism of Monetary Policy in Developing Countries
The monetary policy usually targets interest rates with the aim of enhancing economic growth and currency stability. This is done in order to stabilize commodity prices and to keep unemployment rate as low as possible. Monetary policy is commonly guided by a monetary theory that is in turn determined by needs of a country and objectives of the country's financial authority. The first type of monetary theory is the expansionary theory which tends to rapidly increase the overall supply of money in an economy as stated by Tobin (1969). The aim is to counter mass unemployment as witnessed in a recession. This is achieved by lowering interest rates thus encouraging businesses to borrow from banks thus expanding and hopefully enable them to employ more people. On the flipside, the contrary monetary theory is known as the contradictory theory which is intended to curb inflation with the hope of overcoming a deterioration of the value of assets (Carlyn, 2004). This essay is going to analyze in detail the transmission mechanism of monetary policy in developing countries.
Monetary Policy
A monetary policy refers to regulation on the supply of money instituted in a country by the country's monetary authority, usually the central bank. Monetary policy is determined by interest rates and the total supply of money in that economy. There are systems that are put in place in order to control either interest rates or the supply of money or both. The result is that inflation, unemployment and economic growth are thus manipulated. In instances where the currency is under monopoly of issuance or controlled system of currency issuance through banks, the central bank can change the monetary supply thereby affecting the interest rate (Mishkin, 1995).
Monetary Policy Transmission Mechanism
Monetary policy transmission mechanism refers to the process in which monetary policy directives influence the economy of a country and the price level in particular.
Monetary Policy Transmission Mechanism in Developing Countries
Many developing countries experience difficulty in establishing proper and effective monetary policy. The main challenge is that many developing countries do not have deep markets in government debt an issue that is further aggravated by the difficulty in foreseeing the demand for money and the fiscal pressure forcing the central banks to levy inflation tax. It is important for the monetary policy transmission mechanism to be understood so as to facilitate the proper design and effecting monetary policy. This is so because alterations in the structure of the economy change the effect of structural adjustment. This means that policy makers need to consistently review channels of monetary policy transmission mechanisms or channels (Montiel, 1991).
In developing countries there is a need to have higher ...
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