Student name: Nokutenda Chikonzo

Student i.d: 160182

Course title: monetary economics

Consider the following topics in monetary economics

1. Monetary policies
2. Monetary neutrality

Based on the above two topics make predictions of the monetary effect of corona virus, which
causes the disease covid-19 on African economies
Monetary policy

Monetary policy consists of the process of drafting, announcing, and implementing the plan of
actions taken by the central bank or other competent monetary authority of a country that
controls the quantity of money in an economy and the channels by which new money is supplied.
Monetary policy consists of management of money supply and interest rates, aimed at achieving
macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.
These are achieved by actions such as modifying the interest rate, buying or selling government
bonds, regulating foreign exchange rates, and changing the amount of money banks are required
to maintain as reserves.

Monetary policy is referred to as being either expansionary or contractionary. Expansionary

policy occurs when a monetary authority uses its tools to stimulate the economy. An
expansionary policy maintains short-term interest rates at a lower than usual rate or increases the
total supply of money in the economy more rapidly than usual. The opposite of expansionary
monetary policy is contractionary monetary policy, which maintains short-term interest rates
higher than usual or which slows the rate of growth in the money supply or even shrinks it. This
slows short-term economic growth and lessens inflation. Contractionary monetary policy can
lead to increased unemployment and depressed borrowing and spending by consumers and
businesses, which can eventually result in an economic recession if implemented too vigorously.

In lieu of the corona virus pandemic most developed countries have made massive economic
responses to the COVID-19 pandemic, ramping up spending and using monetary policy to
cushion the blow of lockdowns and other measures that have shut down businesses and left huge
numbers unemployed. But for developing countries, especially African countries, which are now
starting to respond to the crisis more aggressively, such options may be more limited. Here I
discuss some of the likely monetary policy responses to address the economic fallout.

African countries should start by implementing a national response plan focusing on these three
interrelated spheres: the supply and demand of essential goods and services; the domestic
financial circuit in local currency; and the foreign currency market.

In response to this pandemic, the monetary authorities can opt for an expansionary policy aimed
at increasing economic growth and expanding economic activity. As a part of expansionary
monetary policy, the monetary authorities often lower the interest rates through various measures
that make money saving relatively unfavorable and promote spending. It leads to an increased
money supply in the market, with the hope of boosting investment and consumer spending.
Lower interest rates mean that businesses and individuals can take loans on convenient terms to
expand productive activities and spend more on big ticket consumer goods. Governments must
enact initiatives to support employment and income, including expanding safety nets with a food
component. Central Banks must play a key role, pursuing unconventional monetary policies that
establish various channels to inject liquidity in the economy

This is to prevent shortages, price spikes, and suffering in the short term. It is essential to ensure
the production and distribution of food and medicines, which in turn requires keeping
transportation and basic public services (water, energy, and communications) up and running.

The process of creating “modern” Central Banks has mostly involved restricting monetary
instruments, mainly because of concerns about their past use (and abuse) leading to high
inflation in many developing countries; because they may amount to picking winners and losers;
and, perhaps, because of distributive effects. The latter two effects are unavoidable with any
monetary mechanism, however indirect (Coibion et al, 2012).

Nevertheless, Central Banks must expand their options for lending to the private sector and to the
government. Part of the private sector support can be offered through rediscount credit lines to
banks so that they, in turn, may maintain soft lines of credit for the working capital of
companies, especially small and medium-sized enterprises (SMEs). Those soft rediscount lines
should require businesses to keep employees on the payroll. In particular, these lines of credit
could be crucial to support operators in food systems, the health sector, and other crucial
activities.

Lastly, to avoid a run on the domestic currency from the expanded money supply, governments
will most likely have to establish controls on transactions in foreign currency. The government
must be able to manage foreign reserves, calculating the cash flow needed to finance the imports
of food, medicines, energy, and other basic materials for at least six months, while considering
the flows of external debt. One crucial consideration: Avoiding an overvalued official exchange
rate. Many developing countries exports will decline in price and quantity due to lower world
demand, and remittances will also be affected. Addressing that shock requires maintaining an
official exchange rate valuation that does not discourage exports needed to finance crucial
imports and other external flows.

These historically unprecedented times require unconventional responses. Yes, there are several
examples of countries that in the past have abused “unconventional monetary approaches,”
leading to high bouts of inflation, strong devaluations, balance of payment crises, and corruption.
Yet, with prudence, these approaches should now be used to finance specific public
expenditures, such as cash transfers and safety nets for the poor and vulnerable, and certain
public investments, and keep firms operating. In any case, money always gets into the economy
through specific actors (at present, mainly the owners of the assets being bought), and not by
equally endowing each citizen with the same amount of currency. A universal income would do
that, and some of the recent rescue packages in developed countries moved in that direction. The
methods suggested here would ultimately make the channels through which an expanded money
supply gets into the economy more democratic.

Monetary neutrality
The neutrality of money, also called neutral money, is an economic theory stating that changes in
the money supply only affect nominal variables and not real variables. In other words, the
amount of money printed by the central banks can impact prices and wages but not the output or
structure of the economy. The neutrality of money theory is based on the idea that money is a
“neutral” factor that has no real effect on economic equilibrium. Printing more money cannot
change the fundamental nature of the economy, even if it drives up demand and leads to an
increase in the prices of goods, services, and wages.

The idea of money neutrality is a cornerstone in formal monetary theory. It is not free, however,
of some controversy. If there are changes in money supply, why will the economy converge to
the same equilibrium and not to a different one? If changes in money have a neutral effect in the
long run, then the monetary authority can put into motion different monetary policies to deal
with short term problems with the argument that in the long run all the effects are washed away
and his policy is in fact neutral to the market equilibrium. If this is not the case, then it is not so
clear anymore that money changes do not affect the long run stability of the economy. If money
neutrality is an assumption, then it is important to notice if it holds or not.

In response to the covid-19 pandemic, I would have to say money is neutral to an extent. It is
neutral in that, say for example, efforts to open up the Treasury and send money directly to
households might help individuals who have lost their job or seen their working hours reduced.
But some experts argue that the impact is muted if many of the individuals receiving the funds
can’t spend it—after all, many shops and restaurants are closed.

Interest rate cuts, intended to boost liquidity at a time when money is tight, may lose some of
their potency when rates are already conspicuously low. More interest-rate cuts into deep-red
territory might help stock markets, but they also could trigger a run on cash. Usually, an increase
in the money supply will lead to a fall in interest rates. Lower interest rates will also increase
investment, economic activity and inflation. However, in a liquidity trap, an increase in the
money supply may have no effect on reducing interest rates.
On the other hand those aren't the only devices that governments have in their toolkit, however.
They can, for example, activate short-term financing mechanisms that help businesses stay afloat
and retain workers during the healthcare crisis. And they can bolster unemployment insurance
and provide other safety nets that keep the most vulnerable residents from losing their homes or
going hungry.

Most important, perhaps, government leaders can help ensure that hospitals get the vital
resources they need to treat patients and protect doctors and nurses. They can also work with the
private sector to ensure that testing is readily available, something that has to date hampered
efforts to contain the coronavirus in African countries. Indeed, some experts believe the best
economic medicine that the public sector can provide is a quick resolution to the underlying
health threat (Anything that slows the rate of spread of the virus is the best kind of stimulus).

As governments around the world limit the mobility of their people, most experts agree that a
significant drop in economic output is inevitable. The more successful countries are at keeping
the rate of infection in check, the smaller that impact will be. In the meantime, individuals can
help themselves not only by social distancing, but by analyzing their financial situation and
planning for the worst.
References

https://www.investopedia.com/special-economic-impact-of-pandemics-4800597

https://www.brookings.edu/blog/up-front/2020/03/24/money-money-money-the-fiscal-response-to-
covid-19/

https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0145710

https://www.aier.org/article/neutral-money/