What Causes Changes in Monetary Policy?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 13 March 2018
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Monetary policies are regulated by the central bank in a country, and any changes in monetary policy are usually initiated by them. The causes of changes in monetary policy are the result of the reaction of the central bank to any undesirable economic factors, which it usually tries to control through various adjustments to the monetary policy in place. Such monetary policies are usually composed of the upward adjustment of the interest rates or a decrease of the same. For instance, the rate of inflation in the country may be high, and the central bank could adjust the interest rate to address this. Another factor that may affect the monetary policy in place is a lull in the economy that may be caused by a lethargic rate of activity on the market.

One of the causes of changes in monetary policy is a fevered rate of activity on the market where there is a marked disparity between the level of demand for the services and goods in the economy and the ability of the level of supply to fulfill the demand. Where this is the case, the prices for such services and goods will gradually creep upward as the forces of scarcity and supply serve to create a situation where a lot of money will be available for those services and goods that are not there. When this economic factor becomes apparent during an analysis of the results of the periodic business cycles, the central bank will change the currently ineffective monetary policy in order to curb the rise of the inflation.

The method for reducing the inflation in this case would be to address the cause of the inflation, which is excessive demand for too few goods. By increasing the interest rates, the central bank will transmit its new monetary policy to the economy through vehicles that include the other banks in the economy. These other banks consequently increase their own interest rates in direct response to the changes in monetary policy. When the central bank wants to inject more life into an economy that is not active, it will decrease the interest rates, making money available so that the essential consumers in the economy will have the means for purchasing goods and paying for services. In this case, the increased activity will serve the purpose of drawing the economy out of the lapse into which it had fallen.



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