A federal reserve can be formed as part of an economic constitution.
An economic constitution is a statement of policies and guidelines formed by a government to control the economy of a nation. This constitution can be a historical document or a recent one as the government changes its economic policies. The creation of an economic constitution allows the country to have a basis to govern its economy through changes in currency, international business and other factors. The creation of a central bank or a federal reserve is usually part of the constitution. This governing body will consult or make decisions related to certain factors in the economy, such as the money supply and interest rates.
An economic constitution is a statement of policies and guidelines formed by a government to control the economy of a nation.
Western countries and those with a democratic background generally have an economic constitution. The freedom of choice of those who live directly under the constitution is necessary, since economic transactions affect all individuals. A popular vote may also be required in certain countries to create or make changes to the constitution.
International countries can also unite in parts of an economic constitution to create a stronger and more vibrant economy. This could result in a universal currency and potentially freer trade between countries. The ability to work economically with other countries will also improve due to the combined resources.
Monetary policy is normally the main focus of an economic constitution. This policy focuses on price stability through interest rates and inflation control. The power conferred by the constitution normally allows the governing economic body to make policies that expand or contract the economy.
The central bank or the federal reserve will use the money supply as the main tool to keep prices stable. Inflation is often to blame for rising consumer prices. Historically, too many dollars chasing too few goods is the normal definition of inflation. While inflation can, and often does, occur naturally in the economy, runaway monetary policies can also be a huge contributor. Controlling the money supply and interest rates can help a country control this problem in its economy.
An economic constitution can also help a country become more stable and increase economic participation with other countries. Having an unstable economic environment generally reduces the amount of foreign investment from other countries. A stable economy run by a declared constitution allows the country to present itself as ready for foreign investment. The constitution can also rid other government agencies or departments of people trying to control the economy for personal gain. Eliminating as much corruption as possible often helps improve the economy and maintain overall economic stability.