Should Central Bank Value a Currency for Increasing Purchasing Power or Improve Jobs Creation?

Abstract

Central banks modulate the performance of the economy through a variety of means such as adjusting interest rates, bank reserve ratio, or supply and demand dynamics of a currency. These approaches achieve broadly similar goals for improving economic goals but each endure its own set of advantages and disadvantages. More critically, different means for modulating the economy have particular speed limits in translating policy and regulatory action to effects on the broader economy. This preprint focuses on discussing the effects of adjusting currency value on the broader economy by presenting a niche view on how modulating a currency affects purchasing power or improve job creation, particularly in the manufacturing sector. Some central banks target a country’s currency value for keeping the economy in a goldilocks state. Specifically, such central bank would, on a periodic basis, conduct a review of the value of the country’s currency to assess if it is in sync with the overall fundamentals of the broader economy. If the assessment turns out to be unfavourable, then the central bank would perform open market operations to purchase or sell the country’s currency on the world’s financial markets to modulate the value of the currency. But, besides the perspective presented above, there may be times such as the present COVID-19 pandemic when there is a necessity to save jobs and preserve the overall functioning of the economy but preventing the loss of entire economy sectors such as those serving tourism or the aviation economy. This then pose a particular dilemma and conundrum for the central banker: does the central bank need to modulate the currency to increase purchasing power or improve job creation? Typically, economic logic goes that a weaker currency would boost exports, and if the currency value could be sustained for a period of 4 to 6 years, it may help seed investments in the manufacturing sector and help improve job creation. This side of the coin is particularly relevant in light of the economic challenges in the present pandemic. But, on the other hand, a strong currency is needed to improve purchasing power of the people, which also improves the overall well-being of society, where there would be less stress on the social safety net. Thus, the two competing slate of advantages and disadvantages in adjusting a currency’s value for modulating effects on the broader economy presents particular set of dilemma for the central banker, which highlights the increasing trend in which central bank’s policy deliberations have been influenced by political considerations, particular in times of economic distress such as during the current coronavirus pandemic.

Keywords: value of a currency, central bank, policy actions, open market operations, job creation