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Overcoming a depressed economy via Expansionary Monetary Policy ( EMP model)

Overcoming a depressed economy via Expansionary Monetary Policy ( EMP model)

The advent of a pandemic disease such as COVID-19 that ravaged the human race and the world economy a few years ago can indeed lead to a serious shock in a nation’s economic activities, thereby creating some form of economic imbalance, and if not arrested immediately, may further result in a significant reduction in a country’s Gross Domestic Product (GDP), thus raising the bar for unemployment issues to a greater level, which further may result in job losses and, in most extreme cases, lead to a decline in consumers’ confidence level in such an economy.

Where this is the case, then it is obvious that such an economy is in distress or depressed, as the case may be.

In simple layman terms, an economy is said to be depressed if there is a significant decline in a nation’s GDP, which is further occasioned by a decline in consumers’ confidence, thus leading to pauses in economic activities and a rise in the unemployment level.

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In addition to the signs mentioned above, several other indicators can signal a coming economic crisis. These include deflation, or a sustained decrease in prices; a lack of available credit; bank failures and widespread panic about the banking system’s stability; a decline in international trade; a stock market crash; a collapse of the country’s money supply; and a halt in international lending.

Where this is the case, obviously there will be a need for such an economy to be revised or brought back to life quickly in order to avert further crises.

To combat economic depression, various measures have been proposed, each playing a crucial role in revitalising the economy. One significant step is establishing a robust credit facility, which ensures that businesses and consumers have access to the funds they need to invest and spend. This access to credit can stimulate economic activity by enabling businesses to expand and innovate and consumers to make essential purchases.

Reducing unnecessary expenditures is another vital strategy. By cutting down on non-essential spending, both the government and private sectors can allocate resources more efficiently, directing funds towards areas that generate economic growth and stability. This disciplined approach helps to create a more resilient economic foundation.

Creating an emergency funding portfolio is also essential. Such a portfolio acts as a financial safety net, providing immediate resources in times of crisis. This preparedness can help mitigate the impacts of unexpected economic downturns, ensuring that critical functions and services continue without disruption.

Most importantly, easing monetary policy through expansionary monetary policy (EMP) is key. By lowering interest rates and increasing the money supply, the central bank can encourage borrowing and spending, which in turn boosts economic activity. This approach can help lift the economy out of a depression by stimulating demand and fostering a more conducive environment for growth and recovery. Each of these measures, when implemented effectively, can contribute to overcoming economic depression and building a stronger, more dynamic economy.

Expansionary Monetary Policy (EMP) is a policy designed by the nation’s apex bank (the central bank or the Federal Reserve bank) that seeks to expand the money supply in a country, which in turn will boost economic activities and, in addition, bring about a lower interest rate that will further support borrowing by the array of individuals, firms, and banks within the land.

No doubt, the EMP model takes into consideration a reduction in a country’s interest rate with a view to supporting greater investment opportunities, which is pivotal in guaranteeing economic growth and at the same time supporting borrowing.

By lowering a nation’s interest rate, this will guarantee the principle of value for money on the part of consumers, which will spur them to spend, thus leading to increased economic activity.

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In the words of Keynes, as stated under Keynes’s theory, he stated that increases in government spending, reductions in taxes, and above all, monetary expansion (i.e., the EMP model) could be used to counteract depression by any economy witnessing such.

A well-implemented expansionary monetary policy (EMP) offers numerous benefits, which include facilitating economic growth during recessions, providing easy access to funding for investment, reducing unemployment, and promoting business activities and job market growth. Additionally, it can lead to increased consumption patterns, further stimulating the economy.

Moreover, an increased money supply can boost economic output and encourage business investment, thereby promoting overall economic growth. The primary aim of the EMP model is to reduce interest rates and increase the money supply, creating a more favourable environment for economic expansion.

In conclusion, given the substantial benefits associated with the EMP model, it stands as one of the most reliable and effective measures for any nation struggling with economic depression. Its ability to stimulate growth, reduce unemployment, and enhance investment makes it an indispensable tool for economic recovery.

 

Kingsley Ndubueze Ayozie MSc (Finance) Lagos, MBA, ACSI (UK), FCTI, FCA – a Public Affairs Analyst cum Chartered Accountant by profession, writes from Lagos.