Not monetary policy should be the goal of monetary policy. The way that money and loans are managed is based on the government’s overall economic policy, which is meant to reach certain goals. Because economies have changed over time and from country to country, the goals of monetary policy have also changed.It can be hard for a country to decide which goal should guide its monetary policy because different goals often fight with each other. When the central bank makes policy choices about monetary policy, it shouldn’t just look at itself. It should look at the economy as a whole. Check out these objectives of monetary policy to enhance your knowledge.
It is possible for the central bank to use the same set of tools to control both credit and monetary policy. Monetary policy uses tools like the bank rate, open market operations, cash reserve flexibility, and credit controls. Monetary policy, according to R.P. Kent, is “the deliberate management of the growth and decline in the quantity of money in circulation in pursuit of some policy objective, such as full employment.” This is another way of saying monetary policy: “the deliberate management of the growth and decline in the quantity of money in circulation.”
Objectives of Monetary Policy
Monetary policy manages a country’s finances and loans to enhance economic productivity. In Canada, the national bank, formerly the Bank of Canada, oversees this policy primarily by adjusting short-term interest rates, reporting to the federal government. They can raise the bank rate, tightening access to credit and money, affecting inflation and economic functioning. This also influences interest rates and the Canadian dollar’s value by modifying the bank rate and money supply, fundamental to the monetary landscape. Central banks focus on stabilizing prices, managing unemployment, and stabilizing exchange rates. Their objectives include:
Long Term Vs the Short Term
A country’s central bank aims to control the jobless rate, inflation rate, and annual real GDP growth. However, achieving these objectives remains uncertain, primarily due to imperfect economic control. Limited understanding of crucial aspects at the time contributed to this situation. The Reserve Bank of India (RBI) must gain control of secondary targets, which indirectly impact the main objectives. This involves regulating interest rates and one of the three money supply aggregates (M1, M2, or M3). The RBI’s primary role is curbing inflation through money supply management, while also stimulating economic growth by adjusting interest rates, thereby influencing returns on both physical and non-physical capital investments.
Expanding Economy
Global economists and politicians have been most concerned with how to speed up the growth of the economy over the past few years. “Economic growth is the process by which the real per capita income of a country increases over a long period of time,” Professor Meier meant an increase in the total physical or real output, which is the making of goods to meet people’s needs. To put it another way, it is using a country’s natural, human, and financial resources in a way that makes sure national and per capita wages rise slowly over time.
Monetary policy aims to achieve a healthy equilibrium between the money supply and available resources, promoting long-term economic growth. A flexible monetary approach, responsive to shifts in supply and demand, is instrumental in maintaining this equilibrium. This means that the people in charge of money should be able to switch between a loose and a tight monetary policy based on the situation. People need more money when the economy grows, and monetary policy needs to be able to meet that need. The central bank is in charge of making sure that there is enough good money in circulation.
Reducing Volatility in the Economy
Real and potential GDP are both affected by monetary policy in a big way. It is very important for industrialized countries to have monetary policy because it controls trade and helps keep the economy stable. However, it doesn’t help when the economic slump is very bad. The objectives of monetary policy are designed to achieve economic stability and sustainable growth.
Uniformity of Costs
Price stability became extremely important in the 1920s and 1930s of the 21st century. Renowned economists like Crustar Cassels and Keynes emphasized the significance of maintaining price stability as a primary goal of monetary policy. Most economists concur that price stability is the ultimate aim of monetary policy, shielding buyers from the tumultuous swings of economic cycles. Achieving this stability bolsters the economy and ensures an equitable standard of living for all. Contrarily, unstable prices hinder economic growth and can discourage businesses from innovating. This situation exacerbates the trade imbalance by increasing imports while decreasing exports. It’s important to note that when discussing price stability, “price rigidity” and “price stagnation” have meanings different from their sound. Price increases can contribute to economic growth while still preserving the benefits of stable prices.
Employed to Capacity
A sudden rise in the number of people looking for work during the Great Depression caused a lot of people who had employers to lose their jobs. People generally agree that it’s bad for the business and society as a whole. It finally became the main job of the central bank because of this. At this point, this is also known as “full employment.” It may have an effect on how stable prices and exchange rates are. Everything will run more smoothly if these two parts can work together.
Most economists agree that this goal requires a balance between saving and investing during periods of high employment. Classical economists say that full employment is a normal part of every economy. However, it is not being used to its full potential right now, so it is necessary for the nation’s economic health. Also included in this description are people who have had jobs in the past but have been fired since then. Monetary policy should focus on keeping prices stable once an economy has reached its full job potential.
Balance of Payments
People who are in charge of monetary policy have always tried to keep the exchange rate between countries stable. This was the main reason why all countries had to switch to the gold standard. When a country’s balance of payments was off, the market’s free forces fixed it. To balance trade and stabilize exchange rates, adjust money supply when importing or exporting gold by expanding during imports and contracting during exports.
It is possible for gold to leave or join a country because the value of its currency changes. This can hurt the country’s overall balance of payments. So, keeping exchange rates stable is very important for the growth of foreign trade. Because of this, the main goal of monetary policy should be to keep the trade imbalance from changing in a big way. This means that steps need to be taken to get rid of the things that cause coin values to change.
Balance of Payments Stability
Post-World War II, a key monetary policy goal was restoring balance in the foreign payments system. International trade growth outpaced international cash growth, prompting this aim. Previously, it was believed that a growing trade imbalance allowed countries to shift their focus. Consequently, emerging nations reduced imports, hindering economic growth. This means that the group in charge of handling money has to put in a lot of work to keep the balance of payments stable.
Maintaining a Healthy Trade Balance
The maintenance of financial security is another goal of monetary policy. In the end, it became accessible to everyone after the war. This monetary policy goal mainly arises from the difficulty of obtaining foreign currency in international trade. People thought that the rate at which the growing gap in the payment system would grow would slow down. This hurts both economic and social growth. In the end, reaching this goal makes sure that all fees are fair. One of the primary objectives of monetary policy is to maintain price stability, which helps to prevent excessive inflation or deflation.
Money’s Neutrality
Some well-known economists like Wicksteed, Hayek, and Robertson support the idea of neutral money. They believe the central bank should aim to make the currency have no impact on businesses. In past economic instabilities, changes in monetary policy were the main cause. While some people favor altering the currency, others believe it would harm the overall economy. They argue that cyclical oscillations, trade cycles, inflation, or declines won’t occur with neutral monetary policy. Under this system, the central bank’s role is to safeguard the currency’s value, maintaining its objective traits as stable as possible. The total available money supply shouldn’t change, and this is unlikely to alter how businesses and consumers spend.
Rising Prices and Joblessness
Leasing money to people could be used to lower inflation rates. Having low inflation is better for the economy than having high inflation. A strategy that makes the economy shrink could be used to fight inflation that is way too high. There are different ways that monetary strategies can change the unemployment rate, which is a number. As an example, a rise in the money supply helps the economy run, which in turn helps the job market grow and the jobless rate go down. The objectives of monetary policy also include maintaining a stable exchange rate to support international trade and economic competitiveness.
FAQ
When does Monetary Policy Become Noticeable in the Economy?
Monetary policy’s impact on inflation and economic activity is delayed as individuals and businesses require time to adjust. Some experts even propose that it could take up to two years before the full effects of monetary policy changes become evident.
Are Higher Prices a Result of Monetary Policy?
Usually, monetary policy combats seasonal trends, and implementing a countercyclical strategy would lead to anticipated output and job growth. However, prices would go up because the money supply would grow.
Does Demand or Supply Change because of Monetary Policy?
Since the Federal Reserve changes interest rates, it’s possible that the overall demand curve will change. When there is more money in circulation, the slope that shows it moves to the right. If the money demand graph doesn’t seem to be changing, the interest rate goes down to match. People will want more of a lot of different goods and services as loan rates go down.
Conclusion
Most of the time, the interest rate that the central bank charges private banks for loans is variable and can change at any time. When interest rates change overall, banks will change the rates they offer to businesses and people who want to borrow money. Aside from that, it can buy and sell government bonds, change the value of currencies, and change the reserve needs for different banks. Thank you for reading the guide on objectives of monetary policy. Explore the website to keep learning and developing your knowledge base with additional useful resources. For a deeper dive into the data behind advantages of monetary policy issue, read this informative analysis.