Monetary Policy

Monetary policy is basically a process through which the monetary authority of any country regulates the supply of money in economy, often targeting certain rate of interest, specifically with an aim of promoting the economic stability and growth. The official objectives of monetary policy generally include low unemployment and stable prices. Monetary theory provides basis for crafting an optimal monetary policy. Monetary policy is known to be either as contractionary or expansionary. An expansionary policy aims at increasing the total supply of money into the economy at a rapid pace. On the other hand contractionary policy aims at expanding the money supply slowly than usual or sometimes it even tries to shrink it. The expansionary policy is conventionally used to combat the unemployment in a recession period by simply lowering the interest rates, with a hope that easy credit will encourage businesses for expanding. On the opposite edge, Contractionary policy aims at slowing the inflation with a hope of avoiding the resultant deterioration and distortions of asset values. Monetary policy is different from fiscal policy, which in fact refers to the government spending, associated borrowing and taxation. The concept Monetary policy relies upon the relationship that exist in between the rates of interest in any economy (i.e. the price/value at which the money can be legally borrowed) and the total money supply. Monetary policy utilizes a variety of tools in order to regulate one or both of these; secondly to influence the outcomes like inflation, exchange rates with other currencies, unemployment and economic growth. Wherever the currency is under the monopoly of issuance, or wherever there is a controlled system of issuing the currency through the banks which are aligned to some central bank like RBI, the monetary authority finds the ability to alter and regulate the money supply in country and so influence the prevailing interest rates (in order to achieve the policy goals). The concept of monetary policy was originated in late 19th century, but then it was used mainly to maintain the gold standard.