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What Are the Different Types of Monetary Policy Strategy?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 21 November 2016
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Monetary policy is generally set by officials who are appointed or approved by the government. Policymakers are often economists who gather on a consistent basis or as needed in response to the conditions in an economy. One of the key factors that is addressed by policymakers is inflation. If the worth of a currency is rising too rapidly, a monetary policy strategy might be to increase the rate charged on borrowed money. Conversely, when commerce and business activity are slowing, officials might make it easier and cheaper to perform financial transactions.

A monetary policy strategy aims to take responsibility for the level of inflation in a region. The economists who are in the position to influence a business cycle may be known as central bankers. If these individuals become alarmed about the pace at which the value of money is increasing or decreasing, they can step in and attempt to tame the rate of inflation. Policymakers may trigger a change in short-term interest rates, which is the cost banks charge one another for loans, as a monetary policy strategy.

This approach takes into consideration that lower interest rates have enough influence to stimulate economic expansion. It also presumes that tightening borrowing terms will slow business activity somewhat so that growth does not occur too fast. If the action taken by central bankers does not have the desired result, policymakers could intervene further.

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The individuals who establish monetary policy are largely focused on economic indicators, including gross domestic product, the prices that consumers pay, as well as unemployment. They also are engaged in the rate at which citizens can finance a home and obtain a mortgage. The level of loan defaults in a country is also monitored. When credit is tight, and it is difficult for residents to receive funding or avoid foreclosures, a monetary policy strategy could be to improve these statistics.

Central bankers might begin programs that are designed to help individuals either keep or obtain home ownership. Such assistance could include stemming regulation so that the rules surrounding mortgage payments or qualifications for loans are loosened for a period of time. This monetary policy strategy is likely to also promote information where residents are educated on ways to improve their personal financial situations.

Unemployment rates in a country can dictate a monetary policy strategy. Central bankers who believe that a certain amount of inflation can actually curb joblessness, even though the deteriorating value of money is not desired, have historically set economic policy accordingly. This approach involves allowing inflation to rise to a certain level until employment statistics reach an acceptable status before changing interest rates.

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