Monetary policy is
the process by which a government, central bank,
or monetary authority manages the money supply to
achieve specific goals. Usually the goal of
monetary policy is to accommodate economic growth
in an environment of stable prices. For example,
it is clearly stated in the Federal Reserve Act
that the Board of Governors and the Federal Open
Market Committee should seek “to promote
effectively the goals of maximum employment,
stable prices, and moderate long-term interest
rates.”[11]
A failed monetary policy can have significant
detrimental effects on an economy and the society
that depends on it. These include hyperinflation,
stagflation, recession, high unemployment,
shortages of imported goods, inability to export
goods, and even total monetary collapse and the
adoption of a much less efficient barter economy.
This happened in Russia, for instance, after the
fall of the Soviet Union.
Governments and central banks have taken both
regulatory and free market approaches to monetary
policy. Some of the tools used to control the
money supply include:
- currency
purchases or sales
- increasing or
lowering government spending
- increasing or
lowering government borrowing
- changing the
rate at which the government loans or borrows
money
- manipulation
of exchange rates
- taxation or
tax breaks on imports or exports of capital into
a country
- raising or
lowering bank reserve requirements
- regulation or
prohibition of private currencies
For many years much of monetary policy was
influenced by an economic theory known as
monetarism. Monetarism is an economic theory which
argues that management of the money supply should
be the primary means of regulating economic
activity. The stability of the demand for money
prior to the 1980s was a key finding of Milton
Friedman and Anna Schwartz[12] supported by the
work of David Laidler[13], and many others.
The nature of the demand for money changed during
the 1980s owing to technical, institutional, and
legal factors and the influence of monetarism has
since decreased.
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