Monetary policy comprises of the entire processes of making drafts, making announcements, and implementing the action plan which has been taken by the central bank, or the currency board, or any other possible authority of monetary power of a country which controls the quantity of money which goes in an economy and all the possible channels by which any form of new money is supplied.
Monetary policy also consists of the management of the supply of money and interest rates, which are generally aimed towards achieving objectives related to macroeconomic like putting a cap on inflation, on consumption, on growth, and on liquidity.
These objectives are achieved by various actions like modification of the interest rates, ensuring buying or selling of government bonds, as well as regulating foreign exchange rates, along with changing the amount of money which the banks are required to maintain in the form of reserves.
- Monetary policy is just how any central bank or any other agency governs the money supply and rates of interest in an economy so as to influence the country’s output, its employment, and the prices.
- Monetary policy can be classified broadly into two forms: expansionary or contractionary.
- The tools of monetary policy may include various open market operations, various forms of direct lending when it comes to banks, keeping bank reserve requirements, keeping unconventional emergency lending programs, as well as managing market expectations (which are subject to any credibility).
- Economists, investors, analysts, and financial experts all across countries usually eagerly await the reports on monetary policy and the outcome of the meetings which are involving monetary policy. Such policy related developments have had a long-lasting impact on any country’s overall economy, and also on any specific industry sector or market.
- Monetary policy is also formulated on the basis of inputs which are gathered from a myriad of sources.
- The monetary authority might have a look at the macroeconomic figures such as GDP or inflation, along with industry/sector-specific growth rates and related and associated figures, all the geopolitical developments across the international as well as the concerns raised by groups representing industries and businesses, inputs from the government and other credible sources and the survey results from the organizations of repute.
- In addition to that, the monetary authorities are usually given various policy mandates, so as to achieve a stable rise in GDP, to maintain generally low rates of unemployment, and so as to maintain foreign exchange and inflation rates across a predictable range.
- Monetary policy can also be used in proper combination with an alternative to the fiscal policy, this policy also uses taxes, spending to manage the economy and government borrowing.
- The Federal Reserve Bank is the body which is in charge of monetary policy in the United States of America. The Federal Reserve has something called a “dual mandate” which helps the bank to achieve the crux of maximum employment (including around 5% unemployment) and generally stable prices (with 2 to 3 % inflation).
Read More: Foreign Policy
All in all, the monetary policy makes sure of the money related mandates of the countries and it is an indicator of how a country is growing economically.