Moral hazards, adverse selection and the banking industry
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1. What is monetary policy and who is responsible for its implementation?
2. What is the central bank and what does it do?
3. What are adverse selection and moral hazard?
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Solution Summary
This response addresses all three questions in detail, allowing the student to form their own opinion. Six references are also provided.
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1. What is monetary policy and who is responsible for its implementation?
Issing (2011) defines Monetary Policy as forecast targeting for inflation, a proactive approach to controlling the United States’ financial systems, where “…setting the instrument rate such that the forecasts of the target variables look good,’ where ‘look good’ refers to the objectives of monetary policy, such as a given target for inflation and a zero target for the output gap.”
Poole (1999) further explains Monetary Policy like this: “…the concept of a monetary policy rule is the application of this principle (A rule can be defined as “nothing more than a systematic decision process that uses information in a consistent and predictable way) in the implementation of a monetary policy by a central bank.
As you might expect, the Central Bank (discussed in the next section) is responsible for implementing the United States’ monetary policy.
2. What is the central bank and what does it do?
The Central Bank is essentially the Federal Reserve, a bank ran and monitored by the government to provide a multitude of resources for the United States’ banking and financial industry. According to Blinder ...
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