Why the three are powerful
Ben Bernanke heads the U.S. Federal Reserve; Jean-Claude Trichet heads the European Central Bank (ECB); Masaaki Shirakawa heads the Bank of Japan and are regarded as more powerful than leaders of most countries because they are the heads of central banks of the most powerful economies (Samuelson, 2008). These are apex institutions which are regarded as the leaders of money market. Their functions of controlling and supervising as well as regulating the commercial banks’ and other financial institutions’ activities have far reaching effects in the global economy. They are charged with the responsibility of regulating the currency and credit volume in their jurisdictions. Being that these are the most powerful economic blocs, the policies implemented by them will determine the progress of the world economy and hence control the economies of other individual countries in the world (Suri, Budhiraja & Rajput, 2005)
Reasons for low-interest rate
The main motive of opting for low-interest policy during recession is the need to stimulate investment. This is based on the inverse relationship between low-interest rates and investment demand, whereby when interest rates are reduced some projects which otherwise would have been unprofitable become profitable. Therefore investors will be willing to obtain loans and invest and as a result more job opportunities are created. In addition the goods produced will be at affordable prices. With many people employed there will be ready demand for goods produced because people have income to spend. In the end unemployment rates will go down, prices will also go down and as a result inflation is reduced (International Monetary Fund. Research Dept, 1983)
Recommendations for improvement of the US monetary policy
The US government should seek monetary policies that seek to improve the US economy’s international competitiveness. However monetary policies alone cannot be effective in achieving this, therefore fiscal policies such as structures and incentive in the business environment will supplement the monetary policies. The behavior of firms can be used as an important link between macro and micro policy recommendations to enhance international competitiveness. Here the mix of macroeconomic policies will affect prices and profits of businesses through its effect on economic activity level, the exchange and interest rates as well as inflation. Trade and domestic industrial policies on the other hand will affect market structure as well as market access. This will influence firms’ prices and profits which will in turn affect their opportunity of competing in international markets (Howes, 2000)
Through this model the firms are the center of focus of micro and macro economic policies to influence international competitiveness. The mix of monetary and fiscal policies will affect cost of firms and their competitiveness through exchange and interest rates as well as inflation. These policies will be used to influence the ease of market entry as well as exit, to determine the level of foreign competition domestically and the extent to which domestic firms can access markets abroad. These will affect firms’ costs, which will in turn affect prices, profits, investment and employment. As a result income levels and spending will be affected and these will in turn affect inflation levels and economic development (Howes, 2000)
Economic policies implemented by one country directly and indirectly affect the economies of other countries. However some economic world powers like the US, Japan and the European Union have more influence. On the other hand countries cannot only depend on monetary policies to put up measures that effectively put a check on inflation. In addition cooperation of countries is principal factor in the success of various economic policies in the world economy.
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