MONETARY POLICY

Monetary Policy

Monetary Policy

Introduction

Monetary Policy includes all economic measures taken by a central bank to achieve their goals. In a narrower sense, it is a shortage of money a contractive / restrictive monetary policy, an expansion of money supply/expansionary monetary policy. The objective of Monetary Policy is to achieve Price Stability and Economic Growth. However, in some cases Central Banks of the countries have failed to achieve the objective of Monetary Policy and has not been able to control inflation in the economy.

The role of money in economic activity is very important; hence the importance of monetary policy is controversial among different economic schools. It is also because Indirect Monetary Policy has badly failed in few countries, giving rise to criticism.

The Classical Economist assumes that money is neutral. That is, they see the money is an important medium for transactions, and assumes that it is only a "lubricant" used, with no repercussions on the real economy.

The Keynesian economics, while recognizing real economic consequences of the money supply, monetary policy, admits only a supporting role of money. As an expansion of money supply in a recession, the demand stimulation cannot change because the economy is in a liquidity trap. It only has an indirect effect on the interest, which is in Keynesian model, an important determinant of investment (Friedman, 1968, pp. 1-17).

For monetarist, however, monetary policy plays a central role. Instead of short-term interventions, he argues for predictable, steady conditions for the economy. The main objective is to price stability. To ensure this, the representatives of monetarism recommend a rule based monetary growth.

Key Challenges

The primary mission of central banks is monetary policy to promote price stability that is to control inflation, which is a basic condition for sustainable economic growth in the long term. Furthermore, monetary policy also seeks ...