The driving force behind the evolution of theoretical views and practical methods for the implementation of the central banks’ nature was to find ways of solving the two fundamental problems: firstly, to stimulate the economic growth and, secondly, to limit price increases. A significant influence on this process of the consistent globalisation of the world that the economy has had required a research on the effects of monetary policy conducted by central banks and the conditions that are essential for a proper functioning of the global economy.
The liberalisation of financial markets and the increased flexibility in exchange rates have resulted in significant changes not only in the theoretical views on the activities of the central banks and their dependence on the state policy, but also conditions of their practical implementation. Under the influence of these factors, the monetary policy is substantially changed and pursued, and it concerns not only the process of setting goals for its implementation, but also the system which uses tools and methods to achieve their goals. The particular relevance has acquired a range of issues covering the goals and objectives of central banks in terms of ensuring the price stability and dependence on the policy of a state.
The study of transformation of goals and objectives of central banks in the historical perspective suggests that the monetary policy is a considerably flexible tool of the state regulation. Near-zero key interest rates that have been set by the monetary authorities, such as the US Federal Reserve, Bank of England, and the ECB, severely limited the potential of stimulating the monetary policy. However, in the abovementioned circumstances, the first negative aspect in nominal terms has been established in the history of interest rates on deposit operations of the central bank.
A substantially diverse practice and redemption of financial assets included the long-term government bonds, mortgage bonds and securities that backed by non-marketable assets. Carrying only a soft monetary policy, both developed and developing countries actualized issues relating to the role and tasks of central banks within the states’ policy. As a consequence, the purpose of this paper is to investigate whether central banks have to be dependable on the national policy, namely whether central banks should be non-political organisations. This paper is supposed to prove this assumption. In order to do this, it is crucial to regard the Karl Polanyi’s theory and provide an example of the statement’s illustration.
Today, the essence of economic sociology is one of the most dynamic sectors of knowledge. Now, not only the social scientists, but even economists always staunchly defend the priority of their science in the study of the economy and are inclined to believe that the sociological approach can be useful (Andersen, 2015). Apparently, economic sociology regards now what happened in the economic history a century ago, when the economists still had to admit that the history of farming is an essential sector of economic knowledge, although it was not without a scandal.
The ideas of Polanyi in the context of central banks’ nature and dependence are significant to a considerable degree. This is due to several reasons. First of all, this theory re-opened the problem of the relation of economy and society, explaining the main contradictions of the time in regard to the banks’ role. Getting the popularity, Polanyi’s ideas occurred during the first post-war years. In the wake of the neo-Marxist recovery in the US, his theory became substantially helpful. It saw the criticism of traditional capitalism and its ideology.
Polanyi was hard to blame the establishment of commitment (which could not avoid the structural and functional direction). He did not repeat the old dogmas of historical materialism, but brought a new vision of the economy and identified its significance in the history of civilisation.
From the perspective of Polanyi, the economic science was formed in the 18th – 19th centuries, when it was dominated by market relations and the banks’ significance. Therefore, the classical theory simply connects the economic and market principles, receiving the so-called ‘formal’ definition of economics, that is understood as an effective range of the system of ends and means in the context of limited resources. The efficiency and rationalisation are the principal moments, while the limited resources were adopted axiomatically. For Polanyi, a purely logical deduction is unacceptable.
The history and anthropology data suggest that people do not act contrary to the economic rationality. As a rule, they do not have any choice at all. Therefore, for Polanyi, the economy is the means of production to meet the needs of the process (in contrast to the ‘formal’ or ‘substantivist’ definition), where a person is demonstrating its complete dependence on the natural and social environment. The economic process is carried out in the institutional forms, while economics is built (embedded and enmeshed) on the institutional structures (Andersen, 2015). The latter, in particular, religion and financial institutions are themselves a part of the economy.
The economic process is not unique, as the social phenomenon is, whereas it is nested in the support structures, without which it cannot exist. For example, the exchange in the market economy goes along with the ethical process: if the partners are deceiving each other, market relations between them will not characterise the economy as an institutional process of reciprocity, redistribution and exchange. They integrate the individual actions of people in the social structure. The reciprocity is the symmetry of economic and social relations.
The community is archaic; it is the basis of a socio-economic organisation: giving and perceiving, mutual assisting, gratuitous lending are its main characteristics. In ancient societies, reciprocity was maintained within the household or community (which is converted from the local to the neighbouring one), but there is a redistribution, which characterized a centric socio-economic system. If the primitive society was the main institute of community organisations and institutions of kinship, in ancient societies, there was the central institution of the state (Andersen, 2015).
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However, the exchange should not be understood solely as a market mechanism. At first, it was based on the principles of equivalence and retribution: it was not the desire for a profit. Since the competition was not a dominant part of the market, the exchange had not yet been regulated by the supply and demand. Meanwhile, the trade existed outside the market, its presence did not make the society of the Ancient Greece market. The market could work only with money, but the price plan established by the General Meeting or the guild. Thus, it is possible to assume that this structure was similar to the modern Central Bank system and its dependence on the policy.
The difference in the local market prices did not lead to the movement of goods. The market was embedded in the structure of the society and regulated traditions. Gradually, there was a separation of the economy from the society, the economic transactions from the social ones. For example, Polanyi emphasized that the ancient Greek city could be perceived as a political organisation, which required citizens to hold public and military affairs and led to the emergence of the market as a means to ensure that those were not directly involved in the economic process. However, the ancient societies were also not marketable. However, Polanyi stated that the Middle Ages were not much different from them. That was the type of a status society, where personal relationships did not become functional. A personal relationship, mutual support, allegiance and devotion remained paramount. Thus, Polanyi believed that in the primitive, ancient and medieval societies, the economy was embedded in the social relations, and it was determined by them (Gao, 2007). In the modern times, the ratio of the economy and society is changing (Baker, 1999). The first is separated from the second, whereas it acquires the autonomy and self-regulation features. Over time, the economy begins to subdue the society, where the role of the financial institutions changes.
With regard to the application of the Polanyi’s theory and in order to prove the assumption that the central banks have to be non-political organisations, it is necessary to recall the example of the financial crisis. The financial crisis of 2007-2009 occupies a special place in the history of post-war economic turmoil of the Western world (Watson, 2002). This applies to the causes, forms and stages of its development, and the methods used by the central banks and the governments of the developed countries in order to prevent a panic in the financial markets and minimize the negative effects of these phenomena for the real economy.
The crisis began in mid-2007 in the US and then quickly spread to the financial markets and institutions in other countries (Gao, 2007). It was largely predetermined by deep structural changes in the financial intermediation process, which determined the effectiveness of distribution channels, and financial resources across sectors and actors of the market economy system. Those changes had been taking place for several decades prior to the crisis (especially, since the early 1980s) and reflected in the wide dissemination of new financial instruments and transactions related to the functioning of the securities market that also did not fall under the direct control of monetary regulators authorities (Howells, 2013). All this has, in its turn, led to changes in the operating practices of banking and non-banking financial institutions as well as practices of risk management methods. This shows that the central banks are supposed to be less dependent on the state policies which can harm the work of the respective banks.
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In the early stages of the crisis, central banks of the developed countries underestimated the depth of the impending disaster (Iyoboyi, 2013). Their response was slow and limited to the use of traditional instruments of the monetary policy, commonly used in the periods of deterioration of general economic and financial conditions (Watson, 2002). A reveal in the course in terms of the lack of effectiveness of those methods in regard to the crisis and overcoming consequences of the recession has led to enacting a series of non-standard programs and financial assistance methods and, ultimately, to the unprecedented scale cash injections aimed at supporting not only banking, but also other institutions of the financial system which previously had not been subjects to financing from the central banks and the Treasury.
The massive aid campaign focused on banking and non-banking institutions held the world’s central banks in 2007-2009, allowed to reduce the level of stress on the Western financial markets and had an impact on the structure of banking and further monetary policy strategy. In the US, the provision of additional liquidity has led to a significant increase in the balance sheet assets of the central bank: they have increased by 2.5 times (from 869 to 2.259 trillion dollars) (Iyoboyi, 2013). In a half of the year (from July 2007 to December 2008), the bulk of the increase was payable under the credit programs liquidity support (TAF, CPFF, currency swaps). With the improvement of the situation in the financial sphere, the majority of programs expired in 2010, and the debt on them was repaid in full.
The flip side of those operations was a significant increase in funds that was held on reserve accounts of commercial banks in the Federal Reserve banks (up to 2.4 trillion dollars by the end of 2014) (Iyoboyi, 2013). The bulk of those funds accounted for excess reserves . The receipt of substantial amounts of excess reserves on the money market could give rise to new imbalances, strengthen inflationary pressures and significantly complicate the conduct of the monetary policy. In order to prevent this, the Federal Reserve started paying the interest on reserve accounts in September, 2008 (Knafo, 2013). The accrual of interest led to the conservation of considerable sums in the accounts at the Fed and helped to stabilize the situation in the money market. At the same time, the abundance of funds in commercial banks’ balances with the Central Bank of the United States led to a sharp reduce of the demand for loans ‘discount window.’
In the post-crisis years, the EU’s actions were focused on the maintenance of the banking sector and the reduction of the key risks associated with the ongoing sovereign debt crisis of the Eurozone countries with instable economies (namely, Greece, Spain, Portugal and others) and the poor quality of the loan portfolio of banks in Europe as well as the preservation of their low levels of profitability.
The global financial crisis has clearly demonstrated the shortcomings of supervisory and regulatory political systems in most countries of the world, and it has confirmed the need to improve the monetary policy instruments and functions of regulators and central banks in ensuring the financial stability. Central banks sought to increase the liquidity of the banking system, including by providing the assistance to individual systemically crucial banks, which until the summer of 2008 was to some extent associated with the increased ‘inflationary background.’
The growth of a substantial part of household incomes in poor countries was one of the factors in the food price growth on the world markets in the second half of 2007 (Lapteacru, 2014). In turn, due to the high share of food in the consumption basket in developing countries, this led to an increase in the inflation. In such circumstances, the US Federal Reserve, the European System of Central Bank, the Bank of England, the central banks of Switzerland and Japan actually came out in support not only of the banking sector, but also the stock market turning from lenders of the last resort to the ‘creators’ of the market of the last resort which is supposed to go apart with the state policies.
Thus, the major central banks have taken on the responsibility for refinancing the economy, actions of speculators in the stock market and inflating speculative bubbles. In the beginning of 2009, the US Federal Reserve, the ECB, the central banks of England, Switzerland and Japan announced the unlimited (certainly, within reasonable limits) dollar liquidity of the global financial system by the Fed (according to preliminary estimates by at least 600-700 billion Euros) (Lapteacru, 2014).
The measures taken were of an extraordinary nature. When their implementation revealed the lack of necessary tools to provide the liquidity to the banking sector. They had to be created in a hurry. There were the following features of the reaction of the central banks of developed countries to the crisis. First, at the initial stage of the crisis, central banks used the standard tools of the monetary policy (open market operations and changes in the base rate of interest), trying to use them in order to increase the money supply (Palley, 2010). The result of this policy was the reduction of interest rates of the central banks of several countries to zero (USA, Japan, Switzerland, UK).
Thus, the possibility to carry out a standard monetary policy was significantly limited. Difficulties in conducting a standard monetary policy took place primarily in the Anglo-Saxon countries (especially the US), which were traditionally dominated by the financial system based on the financial markets. In order to preserve the stability of the financial system and its functions in regard to the movement of funds between various groups of economic agents in those countries, the additional task was placed for the central banks. It comprised in the necessity to support the individual segments of the financial markets, which played a vital role in the transmission of signals from the monetary policy to the economy. Secondly, the changes were made in the tools of the monetary policy, designed primarily to facilitate an increase in the money supply in the economy in response to the actions of central banks (Palley, 2010).
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All central banks in developed countries have increased the volume of securities accepted as collateral in operations on the open market, and in some cases, additionally the range of counterparties of central banks in those transactions. The latter took place in the Anglo-Saxon financial system of the country, where the access to liquidity was obtained not only by banks, but also by the main participants in the securities market (Roubini, 2006). Thirdly, there was an increase of the term, during which the central bank provided funds to commercial banks. Earlier, the operations in regard to providing the liquidity were calculated mainly on a relatively short period (up to 1 month), due to the crisis, central banks began to introduce mechanisms designed for longer loan terms (up to 1 year). In response to the global crisis, central banks of the developed countries took a number of coordinated actions. There was a coordinated reduction of the refinancing rate by six world’s leading central banks.
Given the role of the interest rate policy, including the regulation of exchange rates, this action has demonstrated the desire of the central banks of developed countries not to use the competing devaluation of currencies to support their economies (Sardoni, 2014). Secondly, a number of central banks have opened a currency swap line to commercial banks experiencing additional financing needs in the respective currency. Especially noteworthy are the swap agreements that the Fed concluded with a number of central banks. There were also other agreements regarding currency swaps between central banks, as well as those that received a substantial political resonance, namely People’s Bank of China’s agreements with Belarus, Argentina and a number of Southeast Asian countries.
Despite numerous measures aimed at increasing the money supply and helping the individual systemically crucial financial institutions, the anti-crisis monetary policy in the major developed countries could not prevent the decline in an aggregate demand and the decline in the respective production. There were difficulties in the functioning of the traditional transmission of monetary policy instruments. In the face of declining confidence in the policies of central banks and increase of the risks, banks have introduced additional restrictions on lending, weakening the impact of the credit channel in the monetary supply (Sardoni, 2014). The monetary authorities have tried to overcome ‘bottlenecks’ that emerged in the financial system as a result of the crisis (in fact, the suspension of individual financial market segments that are significant from the standpoint of transmission mechanism of the monetary policy and the functioning of the financial system).
In general, one of the lessons of the crisis is that central banks should be paid a serious attention to the problem of systemic stresses associated with the occurrence of an acute shortage of liquidity in different segments of the banking system and the money market. During the rise of the crisis, it is necessary to prepare a program of actions, including measures to lending bank and non-bank financial institutions in the short and longer terms, the expansion of types of eligible collateral for transactions of the ‘discount window,’ the temporary provision of the financial institutions of government securities in exchange for illiquid liabilities, concluding the currency swap agreements with other central banks and carrying out massive purchases of various securities to stimulate the banking business and the provision of assistance to the real sector of the economy.
Regarding the essence of the substantial financial crisis, it is possible to claim that it was caused by the measures of a political nature. However, the politics could not solve the crisis. It means that in order to avoid further possible crises, central banks are supposed to be far from the policy making processes. This will permit to establish the independence of banks from the global political process, and, as a consequence, it will prevent a crisis from happening.