Discussion Financial Markets_Monetary Systems_Regional Economic Integration

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Economics

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May 11, 2024

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Key Term and Interest The key term I have chosen for this module is Federal Reserve Bank . Inflation was a very close second for me due to how directly inflation has profoundly affected the lives of every American since the COVID-19 crisis. I will be looking and hoping for a classmate to research on inflation, as I would be interested in learning how inflation has impacted other economies around the world since COVID-19. Ironically, I chose the key term whose mission is to combat and control inflation in the United States. Anyways, I ultimately chose Federal Reserve Bank due to my personal fascination with its founding and history up to the current decade. There have been several nights where I have procrastinated sleep just to watch a lengthy YouTube video discussing the Federal Reserve – whether it be how it originated or what conspiracy is cropping up about it now. Explanation of Key Term Satterlee (2023) tells us that the Federal Reserve Bank “is responsible for regulating the growth of the economy, which is accomplished by the increase or decrease of money supply” (p. 145). On paper, the Federal Reserve Bank’s responsibility is only to the economy in the United States. However, as a major player in the global economy, inflation in the United States is bound to have effects on other economies as well. At the time of this writing, we are finally seeing (what we hope is) a light at the end of the long tunnel that is the Federal Reserve Bank’s efforts to cool inflation by continuously increasing interest rates since shortly after the COVID-19 crisis took hold of the world. Major Article Summary The article I chose to emphasize for this discussion is titled ‘ An evaluation of the inflation forecasting performance of the European Central Bank, the Federal Reserve, and the Bank of England’ . In the article, Argiri et al. (2023) discuss the challenges that central banks face in their mission to forecast errors on their respective national monetary policies. The analysis begins with the 2021-current inflation seen around the globe and how it caught many forecasters off guard, including those at the American Federal Reserve Bank. Officials at the Federal Reserve Bank initially believed the post-COVID inflation would be temporary, but as we all know, it persisted. The analysis then jumps into the respective forecasting methodologies of the three central banks including their data collection methods, forecasting approaches, and utilization of expert judgment. A key finding in the article is that, despite efforts from all three central banks in recent decades to produce accurate and unbiased forecasts, errors still persist – especially in times of high volatility, which the COVID-19 crisis presented to most of the globe. The article identifies limitations of forecasting models and the influence of market expectations as predominant factors in these errors. Ultimately, the article concludes that even with advanced models and experts minds at the disposal of these central banks, it is extremely difficult

to predict future economic conditions, especially when factoring unforeseen events such as the COVID-19 crisis. Nonetheless, the article communicates the importance for each of these banks to continuously refine their forecasting methodologies in order to keep providing their respective policymakers with the best possible information for decision-making (pp. 1 - 13). Discussion I appreciate the cited article for its intersection of the key term I chose and integration of International Business concepts by including analyses of central banks in other countries. As I pointed out in my explanation, we in America are finally seeing signs of cooling inflation, which will hopefully be followed shortly after by lower interest rates. This spike in inflation and interest rates began shortly after the COVID-19 crisis which, as highlighted in the article, was an unforeseen event that caught many forecasters off guard and derailed the economic predictions provided by central banks around the world. As our textbook defined the term, the Federal Reserve Bank’s responsibility is to regulate the growth of the economy – when economic activity spiraled out of control following the COVID-19 crisis, the officers of the Federal Reserve Bank had to steep interest rates up in an effort to cool this activity and re-regulate economic growth. Another article I researched also focused on the same three central banks, but in a more critical context. Sokol (2022) explores the discourse surrounding ‘state capitalism’ with a focus on the role that central banks and their monetary policies play in this concept. His discussion highlights the need for central banks around the world to address environmental sustainability and social equality (pp. 1305 – 1324). The inclusion of environmental and social elements is a novel take on the cited work’s conclusion of revising central bank forecasting methodology. Another article I researched by Haan & Hoogduin (2024) discusses the importance of clear and effective communication in central banks for effective policymaking, with a focus on the European Central Bank. They highlight that transparent, clear and effective communication is necessary for the central banks to meet their objectives of targeting inflation and anchoring expectations about inflation (pp. 1 – 11). I also researched a couple of articles with critical stances against the Federal Reserve Bank. For example, in a critical analysis of the Federal Reserve Bank’s regulatory framework, Barredo-Zuriarrain et al. (2020) argue that, in light of the 2008 financial crisis, a reevaluation of the central bank’s regulatory approaches in order to address the instabilities that are arguably inherent in a capitalist economy (pp. 540 – 563). This aligns with the conclusion in the cited work that continuous development of forecasting methods is needed at central banks. Ironically, they published this conclusion just a year or two before another traumatic economic event fell upon us in the wake of COVID-19. Another article by Lim et al. (2019)

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