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Monetary Economics

In: Business and Management

Submitted By dadabritish
Words 516
Pages 3
What is Monetary Stability?

According to the Bank of England, monetary stability, also referred to as financial stability, refers to stable prices and currency confidence attained by the monetary policies of the central bank. Stable price comes as a result of inflation control.
Monetary stability is important in maintaining sustainable economic growth. For this to be possible, economics agents must be confident in the continuance of a stable monetary value in the economy. This requires that the purchasing power of money be maintained and that money continue to perform its main functions through time. This translates into low and stable interest rates, which is an important factor for stimulating investment and capital accumulation and facilitating savings decisions and portfolio allocation. (Bini Smaghi, 1993).
Exchange rate stability can be defined in nominal or in real terms, i.e. with respect to the rate of exchange between two currencies or their relative purchasing power. When examining the impact on economic activity, it is the latter definition which matters, while the former is relevant only to the extent that it affects the latter. The effect of real exchange rate instability on economic activity depends on the degree of openness of an economy. This needs to be measured in terms not only of the country's trade in goods and services with the rest of the world but also of its ability to influence relative prices. For instance, the absence or removal of tariffs or other types of barrier that can affect the relative prices of traded goods makes an economy more open and therefore more sensitive to exchange rate changes. (Bini Smaghi, 1993).
Price stability is desirable because high and volatile inflation creates uncertainty in the economy, makes business planning difficult and tends to encourage speculative investments. It also creates hardship for

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