Monetary Policy: An overview of what it's all about

Monetary policy can be defined as that policy adopted by the monetary authority of a nation that controls the supply of money in that country, usually targeting towards inflation and other interest rate all to ensure equilibrium in price and currency.

Luofre

Simply put, monetary policy is a tool that checks the increase and decrease in money supply in the economy.

It's usually handled by the central bank of that country.

The monetary policies are enacted through the use of various tools such as shift in interest rates, buying or selling securities etc.

Aims of Monetary Policy

There are various reasons why the use of monetary policies is important to a nation.

Check in inflation rate and unemployment can serve as the primary objective.
Others may include;

Inflation

Inflation levels usually faces the enactment of monetary policies.

A low rate of inflation in the economy is healthy for the nation whereas a high rate of inflation is not healthy because too much money is chasing few goods.

Reduction in unemployment rate

Monetary policies influences unemployment level in the economy.

They can choose to adopt the expansionary monetary policy in other to employ more in the economy to ensure productivity.

Currency exchange rates

The centraltral bank of a nation regulates the exchange rates between domestic and foreign currencies using its fiscal authorities that is the government.

If for instance that central bank wants to increase money supply, they issue currencies.

The domestic currency becomes cheaper than foreign currencies.

Tools of Monetary Policy

In other to implement monetary policies, there are widely utilized policy tools used which includes:

Adjustment in the rate of interest

Interest rates can be influenced by changing the discount rate.

The base rate otherwise known is an interest rate charged by a central bank to banks usually deposit money banks for short-term loans.

For instance, if there is increases in the discount rate, banks increases the cost if borrowing and vice versa.

Change reserve requirements

There is a minimum amount of reserves set by the central bank of the country that all commercial banks are required to adhere to.

With this, the central bank can regulate the money supply in the economy.

These reserves are not invested or loaned out by commercial banks since the monetary authority pays them interest on the reserves kept in their custody.

The interest given is known as IOR (interest onreserves).

Open market operations

Open market operations involves the purchase and sale of securities issued by the fiscal authority by the monetary authority to control the money supply. Securities includes: shares and bonds.

Based on its aims and objectives, monetary policies can be expansionary or contractionary.

Expansionary Monetary Policy
It's is a monetary policy that targets the increase in the money supply in the economy through the decrease in interest rates, buying of securities and reduction in the reserve requirements set for commercial banks.

Advantages of expansionary policy reduces unemployment and enables businesses and spending by consumers.

Contractionary Monetary Policy

Contractionary monetary policy is aimed at decreasing the supply of money in the economy. It's possible through the increase in rates usually interest rates, sale of government bonds, and increasing the reserve requirements for commercial banks.

This policy can be used when commercial banks wants to reduce the supply of money in times of inflation.

For more information click here