Macroeconomic Article Review

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Macroeconomic Article Review

Part I: Introduction and Article Summary

According to Reuter’s reporter, Jake Spring, the International Monetary Fund has

lowered its projections regarding expected global economic growth. As a result, the IMF has

called for accommodative macro-economic policies that will be geared towards sustaining a

stable global economy. It is prudent to note that International Monetary Fund is a global

regulator of macroeconomic activities by advising on exchange rates, promoting international

monetary cooperation and fostering stability of global exchange rates. As a result, it is a major

concern for the IMF to forecast and advice on suitable macroeconomic measures that will ensure

sustainability of the global economy. In advising that countries embrace accommodative

monetary policies, it stands rife that the IMF is advocating for economic stimulus programs. The

term accommodative monetary policies denote the deliberate process through which Central

Banks formulate policies seeking to stimulate growth of national economies by increasing money

supply. Such policies are aimed at reducing the cost money making it cheaper and easier to

borrow.

The Reuters’ article titled “IMF cuts global growth outlook, calls for accommodative

policy”, speculates that the global economy will be faced with inflation in the year 2015, thus

calls upon central banks of national governments to support economic growth through structural

reforms and embracing of expansionary monetary policies. This proposal is made in accordance

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to the World Economic Outlook report which estimates that the global economic growth will be

3.5 in 2015. Among the factors attributed to the growth there are the depreciating yen and euro,

lower oil prices among other negative economic forces such as the anticipated stock market crash

in the U.S. The IMF’s projection is grounded on the argument that the lower oil prices will

impact on imports and exports and this will directly influence on the value of currencies. The

report indicates that countries dependent on Euro currency are likely to experience more

inflationary margins and slow economic growth as compared to those pegged on the dollar. In

response to the IMF report, countries within the Euro Zone will likely lower their interest rates

while the Federal Reserve is expected to raise this indicator.

Part II: Theory Review and Analysis

The article in question, stipulates expected economic conditions for the year 2015. The

arguments raised by the IMF in support of expansionary monetary policies provide a basis for

theoretic analysis and review. Whereas countries in the Euro Zone are required to conform to the

accommodative monetary policies, those countries pegged on the US dollar are not mandated to

follow it. In macroeconomic studies, monetary policy refers to the process through which

monetary authorities, mainly the central bank of a country controls the supply and demand of

money. They often target interest rates and inflation rates in an attempt to ensure the stability of a

currency, prices and increased confidence in the monetary system. By so doing, a country hedges

its currency against inflation and possible economic recession. The goals of instituting monetary

policies are focused on ensuring economic stability and growth, reducing unemployment rates

while simultaneously sustaining a stable exchange rate against other global currencies. This

review and analysis will thus highlight the reasons and theoretical justifications in support of

recommendations made by the IMF to foster the optimization of economic growth.

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Monetary policies can be classified into two: contractionary and expansionary.

Expansionary monetary policies lead to a rapid increase in the total money supplied in an

economy, while contractionary attempts to decrease or shrink the amount of money supplied in

the market. Traditionally, expansionary policies have been implemented to combat increasing

unemployment rates during recession. The central banks lower the interest rates to ease credit

and entice business people into taking loans and expanding their businesses. More potential

investors are also attracted into a country so that they create businesses and increase employment

opportunities. On the other hand, contractionary policies are implemented so as to reduce

inflation. The impact of these policies is felt in the increased interest rates which, in turn, reduces

borrowing and investment. Practically, the IMF’s decision to advise countries on the need to

adopt accommodative monetary policies is justifiable. This is because monetary policies relate to

the management of uncertainties and expectations. These policies are impacted by interest rates

which determine the price of money as well as its supply in the market. Monetary tools use

various tools to influence economic outcomes such as exchange rates, inflation, economic

growth and unemployment. This implies that if the IMF failed to advise countries on the

expected global situations, then it would be risky for the global economy as a whole.

Monetary systems are controlled by Central Banks, which implement these policies and

ensure that the commercial institutions adhere to them. The monetary authority such as the

central banks have the power to alter the demand and supply of money which ensures the

achievement of policy goals. In addition to contractionary and expansionary monetary policies,

there is accommodative, neutral and tight policies. Accommodative policies describe a situation

where monetary authorities focus on creating or stimulating economic growth. Neutral policies

are intended to sustain an economy at a given level, while tight policies are focused on reducing

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inflation. The IMF further recommends on other monetary policies that will facilitate economic

growth. This refers to the possibility of reducing monetary base while increasing reserves. These

two options will contract or reduce money supply and a reverse will expand or increase it.

Among the tools that can be used by central banks there are open market operations (OMO).

They are defined as the process of managing the quantity and circulation of money by buying

and selling financial instruments such as bonds, foreign currencies and treasury bills. OMO

result into variations in the currency base thus impacting on market circulation of money. The

other tools could include moral suasion where the central banks lobby key market players to

implement certain policies so as to achieve a desired market growth index.

The monetary theory stipulates that the aggregate demand for money is influenced by the

price charged in terms of interest rates. This means that the Fed’s decision to raise interest rates

is motivated by the need to implement contractionary policies, while the decision by European

countries to reduce interests as advised by the IMF are motivated by their need to stimulate

economic growth by increasing disposable income. This, correspondingly, will stimulate

increased Gross Domestic Product (GDP). In this case, GDP is regarded as aggregate output

derived from a country within a given period, mostly one year. The interaction of the monetary

theory as proposed by the IMF is illustrated in the figure 1 (check appendix).

Part III: Personal Opinion and Conclusion

From a personal viewpoint, I support the decision by the United States to deviate from

the economic advice given by the IMF. This is because the United States perceives

accommodative policies to be associated with contractionary policies where a raise in the interest

will lead to a reduction in the supply and demand of money. This will lead to a reduction in

economic activities. Furthermore, it can be referred to as neutral or tight policies which will

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shrink economic growth or stagnate it. Which is vital to mention, this goes against the advice by

the IMF. Though, since the US uses dollar currency, its economic condition is stimulated by the

need to strengthen it against Euro. On the other hand, those countries dependent on Euro are

specifically to use accommodative policies since their economies are likely to be impacted by

increased economic activities (import and export) due to the fall in fuel prices among OPEC

countries. This implies that failure to implement accommodative policies will result into the

lowering of the value of their currencies. This, in return, will cause Euro to be less competitive as

compared to dollar. Correspondingly, such strategy would result into a possible economic crisis

as Euro will depreciate in value. Consequently, the confidence of the investors will be reduced

leading to a potential recession within the Euro zone.

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Work Cited

Spring Jake. IMF cuts global growth outlook, calls for accommodative policy. Published on Jan

20, 2015. Retrieved from: http://www.reuters.com/article/2015/01/20/us-imf-economy-

idUSKBN0KT06C20150120.

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Appendix

Figure 1: How the Fed operates in relation to the monetary theory

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