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What Are the Different Methods of Monetary Policy Analysis?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 02 September 2016
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Monetary policy analysis concerns itself with the review of a central bank’s actions to manage an economy. The two biggest factors in monetary policy are the changing of an interest rate or altering of money supply in the economy. Economists engage in monetary policy analysis in order to determine if the central bank’s actions — and the government that controls the central bank — are helping or hurting the economy. Different policy analysis methods include the use of economic models, historical reviews, and academic papers to discuss monetary policy. These studies may take some time to complete depending on the nature of the study.

Economists use models to explain the real-life activities in an economy, making them popular to review central bank or government economic policy. Models can include many pieces of information, such as historical and current data, or explain consumer actions regarding monetary policy. In short, the model uses the inputs gathered by economists from the monetary policy and activities in the current economy. The monetary policy analysis model often has an expected outcome, such as low interest rates should result in higher lending from banks. Other technical aspects from these models also attempt to explain why expected outcomes may not have occurred.

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Historical reviews are a bit less intense than the use of economic models for monetary policy analysis. Economists look at previous situations in history to determine why or why not current monetary policy does not have the proper effect. History can usually provide some good reasoning as to how a central bank or government should shape its monetary policy. For example, an economy that is in a contraction business cycle period may require a historical review to assess what policies will help change this period. Unfortunately, historical reviews are not always the best method of monetary policy analysis.

Academic studies and papers are often a combination of the two previous review methods combined. Many professors working at colleges and universities have PhDs in economics and the ability to conduct thorough reviews on the economy and monetary policy analysis. These studies — which may be funded in part by the government — help provide concrete analysis on certain monetary policy actions. Using many different PhDs to create the paper helps remove bias from the study and results in true support for presented hypotheses. Again, however, the length of papers and presented hypotheses may not always capture the essence of monetary policy and the effects it can have on all demographics in an economy.

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