Monetary policy is a crucial aspect in the field of economics.Governments and states use monetary policies to achieve macroeconomicgoals like consumption, growth, liquidity and inflation. Monetarypolicy includes actions of central banks, the governments and publicauthorities that influence the quantity of bank credit and money. Itembraces all policies that relate to the state’s choice of monetarystandards,
the value of their monetary unit(foreign or metal currency),
the type and amount of the state’s own monetary issues,
determining its power and operation rules,
policies concerning regulation of commercial banks and
financial institutions and the establishment of central banking systems (Friedman et al. 2001)
Monetary policies govern the rates of expenditure through embracinggovernment tax, debt management policies, controlling expenditure andlending. Similar to other economic policies, monetary policy hasthree interrelated elements, which are implementation, objectivesselection and an implicit theory of relationships between effects andactions. In an economy, monetary policy can be directed towardsachieving different objectives. For instance, money supply in agovernment can be regulated by such policies to enhance growth anddevelopment of its economies. This can happen through provision ofcheap or costless funds by a government to help maintain interestrates at some selected level. The regulation and exchange of ratesrelies on a state’s currency as well as the protection of gold andother international reserves. Stabilization of domestic price levelsis also dependent on price levels to help promote employmentcontinuously and recruit more laborers who will help build theeconomy. The above multiple objectives are likely to be compatiblemost of the time. For rational monetary policy making therefore,various objectives have to be identified as an analysis of theircompatibility becomes vital. This will also help determine whichobjectives conflict with each other and find solutions for thoseconflicts.
Economic objectives are met through monetary policies depending onthe economic nature of the economic system. The attitudes towards useof other regulation methods are also a factor that helps promotemonetary policy. The role played by monetary policies is secondary ineconomies where government operations of most economies arecontrolled and regulated in terms of resource allocation, outputdistribution and price inputs and outputs. Money policy is nottrivial even in such economies. According to Friedman et al(2001),excessive money supply can lead to demand and inflammatory pressuresas evident in the black markets, bares shelves, and hoarding.Alternatively, a deficient supply of money can hamper the productionflow and trade. Yet the imperative function of monetary policy issuch economies provide the needed amount of money for facilitation ofoperations of other government controls but not being a primeregulator.
A more positive regulatory role is played by monetary policy ineconomic systems that heavily rely on market forces for organizationand direction of production processes and distribution. In sucheconomies factors like amounts of labor, rates of output, capitalinformation rates amongst others are strongly influenced byrelationships between cost and actual prospective output demands. Ifaggregate demands lack businesses and firms do not find it profitableto hire all available labor, fully utilize existing capacity orpurchase capital goods that can be produced. Excessive aggregatedemands for output can get inflated. Monetary policy comes in to playthe role of regulating output aggregate demand behavior so as toelicit a more favorable performance by the economy. This function isshared with many countries having a fiscal policy in differentcombinations. There has been a considerable increase for fiscalpolicy for this purpose recently.
The primary responsibility for monetary policies administration isassigned to central banks. They regulate money supply and influencecredit supply in two principles as controllers and regulators ofmoney created by commercial bank. Monetary policies are verysignificant in the development of economies. Without money, noeconomic growth can take place.
Liquidity is a crucial aspect in economic growth. It is important inspurring growth and is dependent on monetary policy for maintenance.Liquidity is evident in bonds through open market operations wherebythe banks introduce money to the system and use it to increase orreduce rates of interest.
Another imperative role that is played by monetary policy isinfluencing inflation. Monetary policy influences inflation whenfederal funds reduce their rates leading to stronger demand for goodsor services. This tends to push up economic aspects like demand forcommodities and services, costs of production increase, more demandfor laborers and necessary production materials. The actions of thepolicy also affect the economy’s expectations and its performancein terms of wages, salaries and price ranges. Those expectationsdirectly have an impact on the current inflation. Monetary policiesaffect inflation for example, through actions of consumers orbusinesses on discovering that there will be higher inflation in thefuture. The businessmen start increasing their prices as others startrequesting for bigger salaries. This act increases inflation withoutbig changes in the output and employment.
Friedman, B.M., Solow, R. M., & Taylor, J. B. (2001). Inflation,unemployment, and monetary policy:…., Harvard UniCambridge, Mass. [u.a.: MIT Press.