7BSP0353 - Global Economy: Monetary Policies, Analysis and Impacts

This essay explores the impact of monetary policies on the global economy, focusing on contractionary and expansionary policies and their effects on inflation, unemployment, and GDP growth. It examines how central banks, like the US Federal Reserve, use tools to manage economic stability, considering the monetary transmission mechanisms and asset prices. The analysis includes the challenges faced by emerging economies due to commodity price changes, capital flows, and corporate debt, with a comparison of economic reforms and growth between China and India. The essay concludes by highlighting the importance of handling transition mechanisms and policy instruments to mitigate risks during economic transitions. Desklib offers a wealth of similar academic resources for students.

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ECONOMICS

Global economy
Task – 1
One of the most important aspects for an organization or a company is to declare a monetary
policy that can affect the micro and Macro Economic terms that are being introduced by the
central bank. The major functions of these policies are to help and control the management
functions of the money supply and also the interest rates that can help to control the demand
and supply in a particular type of economy. The monetary policy can also be understood as
the policies that can be helpful to manage any investments are expenses that can affect the
economic condition of a country (Braeutigam, 2010). If the monetary policy is used in a
proper manner then it can be used in a country to reduce inflation and unemployment. There
are different types of targets of monetary policy that are used in the case of the US economy.
For example, it can also be stated that the unemployment rate will be aimed below 6.5 % and
also at the same time the country will focus on increasing the GDP with the 2 to 3 % every
year (Acemoglu & Robinson, 2012).
Generally, there are two types of monetary policies using which a country uses to make the
supply. The two types of monetary policies are contractionary and expansionary policies. In
the case of contractionary policy, the inflation rate can be defined as the old loaded economic
environment that is being observed by the country in that particular time span (Acemoglu &
Robinson, 2012). Contractionary policies also sometimes known as a tight monetary policy,
on the other hand, the expansionary policy tries to reduce the interest so that the economic
growth can be achieved. These policies are also very useful to maintain the economic status
of a country in the recession periods (Braeutigam, 2010). There have been times when the US
Federal Reserve has used many of its economic tools in the open market operations so that it
can improve its economic status. One of the most important situations is of buying treasury
notes from member banks for the fulfillment of credit creation policies.
In the present market conditions and the Global economic environment, it has been observed
that many Central banks are trying to use tools that can help to maintain the economic status
of a country with the help of tight monetary policies. Also been observed that the US
economy is functioning in a similar manner in which the interest rate is considered and
targeted to maintain the economic status. Federal Reserve is also said to use the core inflation
rate in order to maintain the inflation that is present in the variable food and oil prices. With
the increase in interest rates, the loans are also becoming expensive because of which the
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Global economy
citizens are not happy with the money-saving policy (Pennings, Ramayandi & Hsiao, 2015).
These situations may also lead the country to face recession periods.
The monetary transmission models also depend on the mechanism of the monetary
transmission mechanism in which the prices of Assets and existing economic conditions are
taken into consideration when the decisions are taken (Pennings, Ramayandi & Hsiao, 2015).
Hence, it is very important to judge all the basic figures before making an influenced
decision. This model not only affects the overall demand and monetary policy but also the
interest rates and the credit view channels because of which the investment and consumer
spending patterns also differ. It can also be understood with an example of the countries that
are trying to borrow a huge amount of money on the risk of high capital outflow considering
that the dollar-dominated dates and markets will be in their favor. These transitions and
aftershocks must be handled with perfect policy instrument so that the country can be safe
from any harm during the times of recession. It was observed in the year 2016 that the report
of UN on the economic situation clearly stated that the increasing price of the commodity
will not only help to boost the international trade but also will improve the recovery rate.
There were also some external and domestic shocks because of which structural weak points
were observed in the international policies.
GDP Growth in Emerging Economies
The change in the commodity price has affected the large exporters like Brazil, Russia and
Arab while the emerging economy is like China are trying to boost their asset price and debt
concerns. This period was used by the US in order to improve the economic value of its
market and also improvise the monetary policies. Also, focus was created on the absorption
of extra capital in the open market so that the developed countries can use it to improvise the
aggregate demand and strong financial structures can be created by facing the challenges of
high debts. Hence it is very challenging for the emerging economy is to handle the transition
mechanism because of the general conditions that are observed in the global liquidity rate
which are being faced by the emerging economy (Pelanda, 2018). Also, the emerging
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Global economy
economy is said to face hay capital inflow because of which the risk of financial crisis retains
upon them.
Flow of Capital in emerging economies
The slow growth rate of many of the emerging economy is having already started to lower the
global trade version of the country in relation to the political concerns. the poor portfolio is
not only visible in the emerging countries but also the state policies are also gaining the
stability because of which the pressure of increasing inflation may lead the federal reserve to
make changes in the interest rate.
Portfolio capital inflow in emerging economies
The cheap fund and high corporate debt concerns outside the United States have not only
increased the contribution in GDP from 61 % to 100% in the year 2016 but also in the same
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Global economy
context, China has been observed to have the highest price of one 60% in the year of 2016.
Other emerging countries like Turkey, Russia, and Chile are observed to face high leverage
issues that are being abruptly corporate over them with high interest and corporate
deleveraging. In some of the private nonfinancial sectors, the same will affect the service to
income ratio because of the volatile nature of the weak export and the commodity and
earnings. The low income and earnings are also depicting the corporate profitability because
of which cost-push inflation can occur and also a high rate of unemployment can be observed
in the sectors of commodity and service (Mankiw & Taylor, 2011).
Emerging economies – outstanding credit to non financial corporates
The increased interest rates will not only lead to overpowering the dollar market but also
increase the currency mismatch and debt servicing cost. Hence this may also lead many of
your market components and business tycoons to face loss and hamper their domestic
environment because of the low capital in the US that will further also lead to increase the
exchange rate (Mankiw & Taylor, 2011). A large number of corporate debts are said to be in
the state of rest because of the productive investments and moderate productive sectors. The
tight monetary policies in the US will not only be powerful as per the hay payroll and low
unemployment rate moreover it will also affect the consumer price inflation rates because of
which the economic growth will be increased by 2%. Further, the interest rate and balance
sheet normalization programs can also be used to make positive impacts over the major
policy changes and currency mismatches problem that is being observed because of the high
oil prices and cost-push inflation methods that are being used in the market because of
interest changes on reserves.
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Global economy
6

Global economy
Task - 4
Both the Asian giants are not in competition with the other large economy but China has
already been able to conquer France, Japan, and Germany economy with the help of the semi
capitalistic economic nature. the current economic reports not only states that China is the
second largest economy after the US but also the financial exchanges and market components
are also being developed in different ways. The economic reforms were initialized in the 70s
30 by China which has helped it to maintain its centralized economic system (Xie & Cao,
2015). In today's economic world, small changes can help to improve the features of the
market economy. The fiscal decentralization system and the communal system of
fragmentation have helped to improve the financial market by opening channels for foreign
direct investment. During the year 2010, it was observed that the country had already reached
the internal production level of Japan. By the year 2015, China was observed to leave behind
us and become the largest economy for the first time. These major and minor changes that are
being made by the Chinese government in the past 30 years have helped dead to recover low
savings rate so that maintenance of standard domestic consumption, improvisation in
domestication and also reduction of crime, corruption, and pollution (Hong, 2015).
In India, the situation is different because of the transformation of the market with the slow
economic progress rate. There were several measures taken by the government during the
early 90s which have helped it to improvise the annual income rate over the years. The
monetary measures like SOE privatization and low foreign direct investments have helped to
gain economic freedom. The high interest and inflation issues in the year 2011 resulted in
slow growth rate but in the year 2012, the country tried to improvise its economic structure
with the help of foreign participation. these major and minor changes in the Indian economy
over time have not only help to remove the high poverty rate but also helped to improve job
opportunities, industrialization, terrestrial distribution, etc (Ninan, 2013).
However, it needs to be noted that the reform policies that pertain to the economy are
different and the same can be witnessed in the countries growth rate. As per the economic
outlook record of IMF China, it can be noted that it contains high per capita income at prices
that are constant after the year 2010 although both the countries projected the same growth
rate during the phase of the 80s. The changes were noted in the year 90s, and then the graph
varied in the year 1990. During the phase of the 70s, China portrayed a nominal GDP of $214
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Global economy
billion while after 35 years the GDP clocked at $9.2 trillion now (Vidal, 2018). Further, it can
be said that after the reforms in the economy that were introduced in 1978, the secondary
sectors such as industry and construction added to the majority of the GDP. During the same
period, the manufacturing segment of India faced a huge challenge that contained a poor
supply of electricity, transport and deficiency regarding skills.
Growth story of India and China (1980-2018)
Source: IMF World Economic Outlook, October 2018
In the present scenario, the growth rate is high for both India and China but China can be
tagged as slow mover in the case of real GDP in the upcoming time. The table of OECD
gives a proper highlight to this fact:
Growth rate for India and China
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Global economy
When it comes to the case of the infrastructure and transport sector, India is seen ahead of
China during the phase of the 90s considering the overall route km and population per head.
But, over time, there has been an immense change because China introduced 41,000 km
network of the international highway while India remained on the lower version struggling
with poor infrastructure (Xie & Cao, 2015). As per the MGI 2016 report, it is confirmed that
China spends heavily regarding support and that tally more than America. India remained on
the lower front because of red-tapism and poor coordination. When it comes to the political
environment, it can be said that China has a government of centralised nature with the
immense highlight of nationalisation (Smith, 2016). The presence of nationalism guides the
domestic business from the international market with import, import tax and other tools. In
the presence of globalisation, China can be defined to have an environment that is protective.
When it pertains to India, the government is decentralized, and the federal system operates
from the market that is fragmented (Vidal, 2018). The introduction of GST has led to
overcome of the fragmentation problems in the market.
Further, the growth theory of Rostow can shed light on the economies of both the countries in
different stages. As per the method, China can be commented to have empirically derived
growth model while the growth stage of self-sustenance can be attained by an increment of
the savings above the GDP. Further, the five stages of Rostow ascertains that China is in the
step of takeoff where manufacturing, as well as infrastructure, led to the economic
contribution. When it comes to India, the Rostow model states that the country rests in the
fourth stage of the development process that means the economy is ready to venture into the
fourth stage and take a leap from the traditional settings (Ninan, 2013). Hence, it I imperative
that diversification and development in altogether are possible as the first industries that were
prominent are declining to ensure that the new space is reasonable for enterprises, as well as
technologies.
The population in both countries have a considerable population. However, the Indian
population is younger, as well as action against the Chinese aged and matured population.
The working people in India influence the industrial transition while China is facing immense
challenges (IMF, 2018).
Population structure
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Global economy
In this scenario, the human development index is essential for consideration. When it comes
to China, the government is spending on health care that is five times higher than India. The
report of 2015 indicates that China has a high human development while India is on the
medium version. The HDI value of China stands at 0.738 whereas India stands at 0.624. The
infant mortality rate is high in India that is 41.4%. In India, women and young is not provided
adequate attention and participation of girls requires further consideration.
consideration.
Infant mortality rate
As per the UNCTAD review, it can be confirmed that the rural population ranks higher that
means the community is agriculture-specific. When it comes to China, more than 60% of the
urban population in China is industry specific and more educated as compared to the average
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Global economy
Indians. When it comes to India, the rate is 35% that is comparatively low considering the
general competency (IMF, 2018). As per the review of the labour market, the increment in
the nominal wage increment is high in the Chinese market and when it comes to India, the
inflation and unemployment rate clocks higher. The maximum number of employees is
derived from the service, as well as manufacturing industries while India rests upon the
agricultural sectors (Adra & Barbopoulos, 2018). As per the research, it can be commented
that the smart technologies are yet not adequate when it comes to agriculture that is a
potential disadvantage for the country that rests upon low wage. Both the countries are
majorly leaning on the fuel energy and the dominate the oil and gas market. The renewable
energy sector is still under development while the external debt pattern of China is high.
Hence, it can be commented that India has a high growth but will take time to go past the
economy of China.
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Global economy
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