Monetary policy : Objectives and tools
Monetary policy is a demand-side economic policy that is accomplished by the central bank (in USA, Federal Reserve Bank) to…
monetary policy objectives
Monetary policy objectives
By implementing monetary policy, the central bank wishes to accomplish several objectives such as achieve full employment, economic growth, price stability, stable foreign exchange level, neutrality of money. I will explain them as follows.
1. Full employment
The major objective of the monetary policy is to achieve full employment. A developed nation such as the UK and the USA apply the monetary policy to achieve full employment and avoid the fluctuations in the full employment level while developing countries apply monetary policy to achieve full employment. (Pragyandeepa, 2015). On the other hand, full employment is not only an economic objective it is one of the social objectives of a nation. Every government tries to reduce unemployment as they can maximumly. The central bank of a country uses monetary policy with the objective of reducing involuntary unemployment. There are other kinds of unemployment also such as voluntary, frictional, and seasonal unemployment. But they are not concerned to reduce to by a government.
2. Economic growth
Achieve economic growth in other words increasing the real output of a nation is one of the objectives of any country. A successful monetary policy provides the base for economic growth. Monetary policy can be used to influence the interest rates which have a direct relationship with the investment level of a nation. A higher level of investment can stimulate the economic growth of a nation. So, the central bank implements the monetary policy with the objective of increasing economic growth. As an example, US Federal Bank works with the objective of achieving 2 percent to 3 percent annual GDP growth.
3. To achieve price stability.
Achieving price stability in other words, avoiding higher inflations and deflation is one of the major economic objectives of any country. Because price fluctuations not only destroy the economic wellbeing of the nation but also destroys the political stability of the nation. The central bank uses monetary policy to achieve this objective. Before implementing the monetary policy, the central bank always considers that whether it will badly affect the general price level of the nation.
4. Maintain a stable foreign exchange level
Achieving a stable foreign exchange level is very important for any country to succeed in international trade, to attract foreign investors, and so on. So, a central bank should decide the tradeoff between the internal price stability and external price stability level in other words foreign exchange stability. Sometimes, a central bank has to sacrifice the internal price stability to protect the external price stability. So, the central bank implements the monetary policy to protect the stability of the foreign exchange level by controlling the money supply.
5.Neutrality of money
The neutrality of money means maintaining a stable stock of money. In other words, not increasing or decreasing the money stock and make it at a stable level. Wicksteed, Hayek, and Robertson have expressed their opinions to flavor the objective of neutrality of money. (Pragyandeepa, 2015). According to them, any change of the money can cause fluctuations of the economic variables such as inflation, deflation. So, the monetary authority tries to make a stable money stock. This can be identified as a traditional monetary policy objective. Because nowadays, economists more tend to change the money stock to do adjustments to the employment level, economic growth, and so on.