Monetary Policy

Topics: Inflation, Monetary policy, Money supply Pages: 7 (2372 words) Published: January 24, 2013
Monetary policy is the monitoring and control of money supply by a central bank, such as the Federal Reserve Board in the United States of America, and the Bangko Sentral ng Pilipinas in the Philippines. This is used by the government to be able to control inflation, and stabilize currency. Monetary Policy is considered to be one of the two ways that the government can influence the economy – the other one being Fiscal Policy (which makes use of government spending, and taxes).[1] Monetary Policy is generally the process by which the central bank, or government controls the supply and availability of money, the cost of money, and the rate of interest.

Types of Monetary Policy
[edit]Inflation Targeting
Inflation targeting revolves around meeting publicly announced, preset rates of inflation. The standard used is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States.[2] It intends to bring actual inflation to their desired numbers by bringing about changes in interest rates, open market operations, and other monetary tools. [edit]Price Level Targeting

Price level targeting involves keeping overall price levels stable, or meeting a predetermined price level.[3] Similar to inflation targeting, the central bank alters interest rates to be able to keep the index level constant throughout the years. Flourishing and advanced economies opt not to use this method as it is generally perceived to be risky and uncertain. [edit]Monetary Aggregates

This approach focuses on controlling monetary quantities. Once monetary aggregates grow too rapidly, central banks might be triggered to increase interest rates, because of the fear of inflation.[4] [edit]Fixed Exchange Rate

Fixed exchange rate is also often called “Pegged Exchange Rate”. Here, a currency’s value is pegged to the value of a single currency, or to a basket of other currencies or measure of value, such as gold. The focus of this monetary system is to maintain a nation’s currency within a narrow band.[5] [edit]Gold Standard

In Gold Standard, the government allows its currency to be converted into fixed amounts of gold, and vice versa.[6] This may be regarded as a special kind of Fixed Rate Exchange policy, or of Price Level Targeting. This monetary policy is considered flawed because of the need for large gold reserves of countries to keep up with the demand and supply for money. It is no longer used in any country, though it was widely used in the mid 19th century through 1971. [edit]Money Supply Indicator

The New Generation Philippine Banknotes
Money supply indicators are often found to contain necessary information for predicting future behavior of prices and assessing economic activity. Moreover, these are used by economists to confirm their expectations and help forecast trends in consumer price inflation. One can predict, to a certain extent, the government's intentions in regulating the economy and the consequences that result from it. For example, the government may opt to increase money supply to stimulate the economy or the government may opt to decrease money supply to control a possible mishap in the economy.[7] These indicators tell whether to increase or decrease the supply. Measures that include not only money but other liquid assets are called money aggregates under the name M1, M2, M3, etc. [edit]M1: Narrow Money

M1 includes currency in circulation. It is the base measurement of the money supply and includes cash in the hands of the public, both bills and coins, plus peso demand deposits, tourists’ checks from non-bank issuers, and other checkable deposits.[8] Basically, these are funds readily available for spending. Adjusted M1 is calculated by summing all the components mentioned above.[7] [edit]M2: Broad Money

This is termed broad money because M2 includes a broader set of financial assets held principally by households.[7] This contains all of M1 plus peso saving deposits (money...
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