Define Monetary Policy

Monetary policy refers to the set of tools a nation's central bank administers to control the money supply. The goal of monetary policy is to stabilize or grow an economy.

History

The concept of monetary policy began with the Bank of England, created in 1694. Most developed nations formed central banks between 1870 and 1920.

Types

Contractionary monetary policy seeks to lower inflation rates by tightening the money supply. Expansionary monetary policy stimulates economic activity to avoid or recover from a recession. Neutral monetary policy monitors a satisfactory economy.

Tools

A central bank has several tools at its disposal. It can buy or sell federal agency securities, changing the amount of money available to businesses and people. Another tool is adjusting interest rates on loaned money; increasing them under contractionary policy makes borrowing more difficult, and lowering rates is an expansionary tool encouraging businesses to obtain new capital.

Effects

Central banks use monetary policy tools to lower inflation, stimulate the economy, reduce unemployment, or affect international exchange rates.

Institutions

Examples of central banks include the European Central Bank, the Reserve Bank of India, the U.S. Federal Reserve, and the Bank of Japan.

References

• US Federal Reserve's tools and definitions of monetary policy
• IMF