What is a Monetary Policy?

Monetary policy is basically a process through which the monetary authority of any country regulates the supply of money in economy, often targeting certain rate of interest, specifically with an aim of promoting the economic stability and growth. The official objectives of monetary policy generally include – low unemployment and stable prices. Monetary theory provides basis for crafting an optimal monetary policy.

Monetary policy is known to be either as contractionary or expansionary. An expansionary policy aims at increasing the total supply of money into the economy at a rapid pace. On the other hand contractionary policy aims at expanding the money supply slowly than usual or sometimes it even tries to shrink it. The expansionary policy is conventionally used to combat the unemployment in a recession period by simply lowering the interest rates, with a hope that easy credit will encourage businesses for expanding. On the opposite edge, Contractionary policy aims at slowing the inflation with a hope of avoiding the resultant deterioration and distortions of asset values. Monetary policy is different from fiscal policy, which in fact refers to the government spending, associated borrowing and taxation.

The concept
Monetary policy relies upon the relationship that exist in between the rates of interest in any economy (i.e. the price/value at which the money can be legally borrowed) and the total money supply. Monetary policy utilizes a variety of tools in order to regulate one or both of these; secondly to influence the outcomes like inflation, exchange rates with other currencies, unemployment and economic growth. Wherever the currency is under the monopoly of issuance, or wherever there is a controlled system of issuing the currency through the banks which are aligned to some central bank like RBI, the monetary authority finds the ability to alter and regulate the money supply in country and so influence the prevailing interest rates (in order to achieve the policy goals). The concept of monetary policy was originated in late 19th century, but then it was used mainly to maintain the gold standard.

Different countries frame out their Monterey policy by keeping an economic concept as prime target, for example- RBI utilize the Monterey policy in India to target the inflation in prevailing system. Examples of various countries and their target concepts are given below-

• Brazil’s policy – Inflation targeting
• Australia’s policy – Inflation targeting
• Chile’s policy – Inflation targeting
• Canada’ policy – Inflation targeting
• Czech Republic’s policy – Inflation targeting
• China’s policy – Monetary targeting
• Hong Kong’s policy – Currency board (that is fixed to US dollar)
• Colombia’s policy – Inflation targeting
• New Zealand’s policy – Inflation targeting
• India’s policy – Multiple indicator philosophy
• Singapore’s policy – Exchange rate targeting
• Norway’s policy – Inflation targeting
• Switzerland’s policy – Inflation targeting
• South Africa’s policy – Inflation targeting
• United Kingdom’s policy- Inflation targeting and targets on the ‘employment and output’.
• United States’ policy- Mixed policy
• Turkey’s policy – Inflation targeting

Leave a Comment