What Is Loose Monetary Policy?

Jim B.

A loose monetary policy is one that is enacted by a government wishing to stimulate growth in the economy by allowing more money to enter into it. This is typically achieved either through issuing more currency, buying up government bonds, or lowering interest rates to encourage borrowing. In many cases, a loose monetary policy is used at a time of economic crisis as a way to put money back in the hands of consumers and get it flowing throughout the economy. Opponents of such a policy feel that this has the potential to devalue money, create debt, and is largely unnecessary in a market economy.

Loose monetary policy is the term used when the Federal Reserve infuses the economy with large amounts of money, or currency.
Loose monetary policy is the term used when the Federal Reserve infuses the economy with large amounts of money, or currency.

Governments must often make tough decisions regarding the status of their economies. Since they have the power to affect the financial well-being of their citizens, these governments often try to push their economies in the direction they need to go. They can do this by controlling their monetary policy. Whereas a tight monetary policy consists of a hands-off approach, a loose monetary policy is a more aggressive approach to giving life to a stagnant economy.

One of the ways that a government can partake in a loose monetary policy without actually printing more money is through interest rate manipulation. When a government lowers its federal interest rate, the rates of lenders all through the economy tend to follow suit. In this way, consumers are encouraged to borrow money more freely. If the policy works well, they will then spend that money throughout the economy instead of saving it, thereby spurring economic growth.

Regardless of how a loose monetary policy is instigated, it is generally used when an economic crisis arises. Governments are often forced to react when an economy is in decline. As they pump more money into the economy, the hope is that eventually the crisis will stabilize. Once that occurs, they can go back to a monetary policy that is more conducive to long-term stability.

Not all economic experts feel that a loose monetary policy is a wise decision, even in the toughest of economic times. Their concern is that the money used to stimulate the economy can add to a country's deficit, and, as a result, more problems will arise in the future. In addition, those against such a policy feel that putting too much money into the economy can devalue the currency of the country. Opponents would also be more likely to allow the workings of the market economy to correct the problems over the long haul.

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