Monetary Policy

The Monetary Policy of a country is a money supply management strategy designed and used to impact the economy. The monetary policies in most countries of the world are carried out by the central bank of the country. The monetary policy of a country is all about managing the money supply. Depending on the economic situation a monetary policy can be expansionary or contractionary. An expansionary monetary policy aims to expand the money supply in order to combat recession and unemployment. In contrast the goal of a contractionary monetary policy is to decrease the money supply, in order to fight inflationary pressures.

The central banks responsible for the monetary policy implement their policies using several tools. The central banks buy/sell government bonds (this is known as open market operations), and thus decrease or increase the money circulating in the economy. The central banks are also responsible for managing interest rates and by doing so they control the money supply. Higher interest rates discourage borrowing, which decreases the money supply by decreasing money created through loans. Lower interest rates entice borrowers to borrow more, which creates more bank money through loans.

The monetary policies of most countries aim to ensure price stability/low inflation and to preserve the value of their currency. Other common objectives are to keep unemployment low and facilitate steady economic growth.

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