Why is money supply not under the tight control of central banks Essay - 3

Why is money supply not under the tight control of central banks - Essay Example mics, is that one of the main functions, or the main function, of the central bank is to analyse the progress of the economy, and then to steer it with skilful judgment towards health and growth, by making decisions to change their base interest rate, with carefully chosen timing, amount and direction. One of these objectives is the control of money supply ((Black 2000, Visser 2005, Smullen & Hand 2005). Fiscal and monetary policies are among the most important public policies available in promoting growth and stability within the institutional framework of a free, competitive society (Black 2000, Visser 2005, Smullen & Hand 2005). By definition, fiscal policy is customarily defined as a manipulation of the government financial transactions, why on the other hand monetary policy is governmental control over the quantity of money or its terms of exchange (Winston, Holt &Hall 1960). In other words, these are tools being manipulated by the government to achieve desired economic and government objectives. One of these objectives is to control the supply of money. Monetary policy is referred to as a means by which the central bank tries to sway the economy to equilibrium by influencing the supply of money (Black 2000, Smullen & Hand 2005). This is achieved through four main approaches, which include: printing more money; direct controls over money held by the money sector; open market operations and influencing the interest rate. Both tight and easy monetary policies can also be identified. Like easy fiscal policy, easy monetary policy is one whereby the central bank embarks on a policy to increase the supply of money. On the other hand tight monetary policy is a policy whereby the central bank embarks on a policy to limit the circulation of money such as increasing interest rates. Fiscal policy refers to a situation whereby the government restores equilibrium in the economy by making changes to taxes or government expenditure on public goods and services (Smullen &