The federal reserve system operates under a seven-member board of governors. The

Question

The federal reserve system operates under a seven-member board of governors. The term of a governor is 14 years, and governors usually cannot serve more than one tearm. Terms are staggered so that one governor's term expires every other year. Governors can only be removed from office "for cause", that is, for abuse of their office, not just for policy disagreements. In what way do the long terms and secure tenure of Federal Reserve governors help to overcome the problem of time inconsistency in monetary policy? Discuss

Explanation / Answer

monetary policy usually shows the current liquidity position of a nation, and it depends on many factors. some of the factors are internal in nature and some other are external in nature. internal factors are: estimation of public expenditure, need for new investments, controlling the interest and inflation rates, targets of government like GDP rates, Employment rates and production rates etc.

external factors includes international trade of the nation, volume and value of imports and exports, the uses of currecny in international level, and other international factors like BREXIT.

policy makers and governors can control and focus on internal factors only, but because of the external factors also the monetary policy should be modified. and these can not be controlled by the governors at domestic level, hence they need to modify the policy.

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