Monetary policy is a set of actions and measures by the central bank through the control of criticism to achieve the objectives of economic policy. Monetary authorities traditionally work within the context of economic policy in their various manifestations to achieve objectives such as sustained growth rates, exchange rate stability and balance of payments balance.
There are two methods of applying monetary policy: deflation, with the aim of reducing inflation, so as to raise interest rates, sells securities through open market selling and buying, and expansionary monetary policy, which is used to reduce unemployment and economic stagnation. Reduce interest and buy securities, to increase liquidity. This is achieved through measures such as interest rate adjustments, the purchase or sale of government bonds, the regulation of foreign exchange rates and the volume of funds required for banks to maintain as reserves.
Tools for monetary policy
Central banks use a number of tools to shape and implement monetary policy. The most popular option is to adjust interest rates that have a sequential effect on the macroeconomic. For example, it may be necessary to adjust the specific interest rates imposed by the central bank on the overdraft taken by the commercial banks of the central bank. When commercial banks can borrow from central banks at lower prices, they have more liquidity and credit to provide to the economy by providing loans to their customers at lower prices. If these rates are high, commercial banks will borrow less and limited funds will be available in the economy.
The second option used by monetary authorities is to change reserve requirements, which refer to funds that banks must keep as a percentage of deposits provided by their customers. Lowering this reserve would result in more capital being released to banks through which funds available to lend or buy other profitable assets could be increased. Increasing these reserve requirements has the opposite effect of helping to contain money supply.
Authorities are also using a third option called open market operations to expand or approximate the money supply in the country's banking system. It includes the purchase and sale of government securities such as bonds or foreign exchange on the open market. The purchase of government debt increases the amount of cash traded and maintains reserve accounts for banks. With more money available in its reserves, it has the freedom and competitive pressure to reduce lending rates, making borrowing cheaper and stimulating the economy. The sale of government debt withdraws money from the market and ultimately leads to tight money supply.