Weaknesses of Monetary Policy

1. Impact Lag: It has been noted by many economic commentators that there can be a significant impact lag associated with the implementation of monetary policy. In general, it is safe to assume that there is a month lag after any change in interest rates before it will have an impact on the economy. A 1% change in interest rates has a 0.75% effect on GDP 40% of a rate change has impact in first 12 months 80% of rate change felt after 2 years 100% after 3 years

Weaknesses of Monetary Policy 2. Blunt instrument: Monetary policy affects all participants in the economy. It is non selective, unlike budgetary policy. Sectors of the economy not doing well even in times of a boom will be effected substantially by a rise in interest rates. When interest rates are increased, any business or consumer with a loan will have to pay a higher rate of interest in order to finance that loan, no matter what there circumstances.

Weaknesses of Monetary Policy 3. Effectiveness: monetary policy is more effective when employed to slow the economy and combat inflation than it is to stimulate it. To stimulate the economy as you need business and consumer confidence to increase before people start spending extra discretionary income and business start to invest. Proof of this has been since the GFC in 2007, many economies have had zero real interest rates (Japan, U.S., France, Spain) but have been unable to stimulate economic growth.