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What Is the Conduct of Monetary Policy?

The Federal Reserve sets monetary policy in the United States.
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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 27 October 2014
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The conduct of monetary policy refers to the issues related to the application of monetary policy in an economy. Some of the issues that may be raised in an analysis of the conduct of monetary policy include the goals that precipitate the necessity for monetary policies in the first instance and the methods for the transmission of the polices as well as the effects of such policies on the economy. Goals for the utilization of monetary policies in an economy include such factors as the reduction of inflationary trends and the injection of new life into a floundering economy.

When discussing the conduct of monetary policy, the question of the aims that necessitate such policies in the first place often come up. The necessity for monetary policy is derived from the desire by the government, through the central bank, to achieve economic stability in a country. Such policies are usually targeted toward the regulation of the general economy by addressing some macroeconomic issues that will ultimately affect microeconomic factors in the economy. An example of a factor that makes these policies necessary is a high rate of consumption in the economy under consideration that could result in rising inflation. Through the conduct of monetary policy, the central bank will apply the particular monetary policy that will target the unwanted trend.

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When the central bank has selected the particular monetary policy it will use as a means of addressing the adverse economic trend, it will transmit this to the wider economy through the use of certain vehicles that include the other banks in the economy. For instance, in order to address the rising inflation it will increase the interest rates, which will hopefully help curb the inflation through the targeting of the underlying factors that are responsible for the inflation. The banks will help it in this quest by also increasing their own interest rates, making it hard for consumers to have the easy access to finances that they enjoyed before then.

The effect of such conduct of monetary policy is usually to curb the undesired factor that led to the transmission of the policy in the first instance. For instance, in the case of an inflation, the increased interest rates will affect the ability of consumers to finance their consumption, making them scale back on the rate of such consumption. When this happens, the scale of demand and supply will hopefully right itself as the prices of goods and services fall in the face of a reduction in demand.

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