In mature economies, monetary policy must serve the purposes of stabilization and correct systemic balance. However, in less developed nations, the monetary policy needs to be more active in order to fulfill the demands of a growing economy by fostering favorable conditions for it to grow. Strategic, intermediate, and tactical monetary policy are all possible. The tasks listed below are crucial to achieving strategic or major goals.
employment among the populace increases; prices normalize; inflationary processes are contained; economic growth is accelerated; output volumes rise; and the state's balance of payments is aligned (balanced).
In contrast, achieving intermediate goals involves altering the interest rates and money supply. By doing so, it is possible to modify both the supply and demand of money as well as the existing demand for commodities. The ultimate goal is to influence the degree of price policy, draw in investment, grow the labor force, and boost output. It is also feasible to maintain or improve the current situation in the money (commodity) market;
Tactical objectives are time-bound. Their job is to hasten the accomplishment of more significant, intermediate, and strategic goals:
- Controlling the level of interest rates; - Monitoring the money supply; - Controlling the currency rate.
Different Monetary Policies
Every nation selects a unique type of monetary policy. It may change according on factors like as the weather, the situation of the economy, the growth of production, employment, and other variables. There are three distinct types:
1. Soft monetary policy, sometimes known as ""cheap money policy,"" aims to stimulate different economic sectors by controlling interest rates and expanding the money supply. The Central Bank does the following activities at the same time: - Conducts trades to buy government securities. All transactions take place in the open market, and the money earned is then put into the accounts of the populace and bank reserves. Such steps enable boosting the money supply and enhancing the bank's financial capability. The interbank loan is therefore in high demand; - Reduces the rate of bank reservations, which greatly increases the lending prospects for different economic sectors; - Lowers the interest rate. Commercial banks are thus given access to loans with better terms. The amount of loans made to the populace on more favourable terms has increased, and deposits have become more attractive.
2. Expensive money policy, also known as rigid monetary policy, aims to impose different limitations and restrain the growth of money in circulation with the primary objective of containing inflationary processes. The Central Bank has a rigorous monetary policy and does the following things:
- Increases the bank reservations maximum. This results in: - A decrease in the expansion of the money supply; - An increase in interest rates. Due to this, commercial structures are compelled to halt the Central Bank's borrowing activity and restrict the issuing of loans to the general population. As a result, the expansion of the money supply is restrained; - Government securities are sold. Due to the population's current accounts and the reserves of commercial credit and financial organizations, transactions are also taking place on the open market at the same time. The outcome is the same as in the prior instance: the amount of money supply declines."""