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What Are the Objectives of Monetary Policy?

K. Kinsella
K. Kinsella

The objectives of monetary policy involve controlling the flow of currency into the economy to stabilize or bolster the regional or national economy. In most instances, elected or appointed government officials are responsible for deciding upon the objectives of monetary policy for a particular period of time. Policies change over the course of time as policymakers react to domestic and international economic developments.

Governments and central banks can control the monetary supply by increasing or decreasing the production of new bills and coins at regional or national mints. Typically, mints print bills and manufacture coins on a continuous basis so that worn and tattered currency can be replaced. When production increases, the real value of a nation’s currency decreases because currency exchange rates are partially based upon supply and demand. Consequently, a mint may slow down production if the government’s objectives of monetary policy include bolstering the market value of the nation’s currency.

The Federal Reserve often sets monetary policy to control inflation.
The Federal Reserve often sets monetary policy to control inflation.

Some nations lack natural resources and governments and businesses in these countries are heavily reliant upon imported goods. Foreign goods become less expensive when the domestic currency weakens while goods become more expensive if the nation’s currency increases in value. Consequently, nations that export large quantities of goods usually attempt to keep the value of the domestic currency at a relatively low level. Increasing the money supply is one measure these nations can take in order to achieve this objective.

To keep unemployment levels low, the objectives of monetary policy in most nations include taking steps to increase growth. Companies need capital in order to expand and consumers need easy access to inexpensive money so that they can buy goods and help companies to grow. Policymakers often reduce central bank lending rates so that it becomes less expensive for banks to borrow money. In theory, these savings are passed on to consumers in the form of low interest rate loans and credit cards. Low interest rates usually help to spur growth so many governments use interest rates as a monetary policy tool.

On some occasions, countries can experience economic difficulties when growth becomes too rapid because inflation causes prices to rise when demand starts to outpace the supply of goods. Therefore, in nations with booming economies the objectives of monetary policy can include stifling growth rather than encouraging it. Central banks sometimes raise interest rates to make borrowing more expensive while other banks slow down the production of new money so as to make funds more difficult to obtain.

Historically, nations have developed monetary policies that are based upon the economic conditions in a particular region or country. Towards the end of the 20th century, many nations began to develop monetary policies that were in the best interests of groups of nations rather than individual countries. The European Union (EU) is one example of an economic bloc which dictates monetary policies for entire group of nations. In other parts of the world, less formal groups sometimes liaise on policy making decisions.

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    • The Federal Reserve often sets monetary policy to control inflation.
      By: qingwa
      The Federal Reserve often sets monetary policy to control inflation.