Monetary Policy

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According to the Oxford Dictionary of Economics, monetary policy is the use by the government or central bank of interest rates or controls on the money supply to influence the economy. The Central Bank of every country is the agency which formulates and implements monetary policy on behalf of the government in an attempt to achieve a set of objectives that are expressed in terms of macroeconomic variables such as the achievement of a desired level or rate of growth in real activity, the exchange rate, the price level or inflation, the balance of payment, real output and employment. Monetary policy works through the effects of the cost and availability of loans on real activity, and through this on inflation, and on international capital movements and thus on the exchange rate. Its actions such as changes in the central bank discount rate have at best an indirect effect on macroeconomic variables and considerable lags are involved in the policy transmission mechanism. According to Bernanke (2004), the monetary policy goals of the Federal
Reserve Bank (the Central Bank of the United States), as often stated in publications and testimony of Federal Reserve Bank (Fed) officials, are “price stability” and “sustainable economic growth”. Recently Federal Reserve officials and academic economists have addressed the question of whether, in addition to price level stability, a central bank should also consider the stability of assets prices. Monetary policy makes use of various instruments which include interest rate, reserve requirements (cash requirements or cash ratio and liquidity ratio), selective credit controls, rediscount rate, treasury bill rate amongst others. Electronic copy available at:
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy. An expansionary policy increases the total supply of money in the economy rapidly or decreases

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