Monetary policy is a collection of actions made by the government's central bank to keep the economy stable (strengthening the national currency, accelerating economic growth, lowering prices, and so on). It is a component of macroeconomic policy, and it is implemented using a variety of approaches and tools, depending on the goals.
Monetary policy in developed economies must serve the purpose of stabilising and preserving adequate economic equilibrium. However, in the case of developing countries, monetary policy must be more active in order to fulfil the needs of a growing economy by establishing favourable conditions for growth. The three types of monetary policy are strategic, intermediate, and tactical. The following tasks are critical for achieving strategic or primary goals.
- Increase in population employment; - Price level normalisation; - Inflationary processes contained; - Acceleration of economic growth; - Increase in production volumes; - Alignment (balancing) of the state's balance of payments
Intermediate goals, on the other hand, are achieved by altering interest rates and the amount of money in circulation. In this approach, the current demand for commodities can be adjusted, and the supply of money can be reduced (increased). The bottom line is to have an impact on price policy, attract investment, increase employment, and increase output. It is feasible to preserve or revive the conjuncture in the money (commodity) market at the same time.
Tactical objectives are short-term in character. Their mission is to expedite the accomplishment of more significant intermediate and strategic goals:
- Controlling the money supply; - Controlling the level of interest rates; - Controlling the exchange rate
Monetary Policy Types
Each country determines its own monetary policy. External conditions, the state of the economy, the development of production, employment, and other things can all influence it. The following classifications are made:
1. By managing interest rates and raising the supply of money, soft monetary policy (also known as "cheap money policy") aims to stimulate various sectors of the economy. The Central Bank executes the following operations at the same time: - Executes government securities buy operations. All transactions take place on the open market, and the proceeds are transferred to the banks' reserves and the accounts of the general public. Such acts allow for the expansion of the money supply and the strengthening of bank financial capability. As a result, the interbank loan is in high demand; - Reduces bank reservations, so greatly expands lending prospects for diverse sectors of the economy; - Lowers interest rates. As a result, commercial banks are able to obtain more lucrative loan arrangements. Simultaneously, the number of loans issued to the public under more favourable conditions, as well as the attraction of more capital in the form of deposits.
2. Rigid monetary policy (also known as "expensive money policy") aims to impose different constraints on the growth of money in circulation with the primary goal of preventing inflation. The Central Bank follows a rigorous monetary policy by doing the following:
- Increases the amount of money that can be held in a bank account. This results in a decrease in the increase of the money supply; - a raise in the interest rate. As a result, commercial structures are compelled to halt borrowing from the Central Bank and restrict the supply of public loans. As a result, the increase of the money supply is stifled; - Government securities are sold. At the same time, due to the population's current accounts and reserves of commercial credit and financial organisations, transactions are made on the open market. The consequence is the same as in the prior case: a reduction in the money supply volume.
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