Quote: "Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability..."
The actions taken by a central bank to manage the money supply and interest rates.
Macroeconomics: The study of the economy's aggregate performance and the factors that influence it.
Central banks: The institutions responsible for managing monetary policy and maintaining price stability.
Monetary policy: The process of regulating the money supply and interest rates to influence the economy's performance.
Fiscal policy: The use of government spending and taxation to influence the economy's performance.
Money supply: The total amount of money in circulation in the economy, including both physical currency and deposits.
Inflation: The rate at which prices for goods and services are rising in the economy.
Interest rates: The cost of borrowing money, which affects consumer and business spending.
Money multiplier: A formula that calculates the amount of money that can be created from a given increase in the monetary base.
Open market operations: The buying and selling of government securities by the central bank to influence the money supply and interest rates.
Reserve requirements: The amount of money that banks must hold in reserve against deposits.
Discount rate: The interest rate at which the central bank lends money to commercial banks.
Exchange rates: The value of one currency relative to another, which can affect international trade and investment.
Quantitative easing: A monetary policy approach in which the central bank purchases large quantities of government securities to increase the money supply and lower interest rates.
Phillips curve: A theoretical relationship between inflation and unemployment, which suggests that policymakers can trade off higher inflation for lower unemployment or vice versa.
Output gap: The difference between actual GDP and potential GDP, which affects inflation and employment.
Velocity of money: The speed at which money is circulating through the economy, which affects the impact of monetary policy.
Taylor rule: A policy rule that specifies how the central bank should adjust interest rates in response to changes in inflation and output.
Nominal and real interest rates: Nominal interest rates reflect the stated rate of interest, while real interest rates adjust for inflation to reflect the true cost of borrowing.
Liquidity trap: A situation in which interest rates are so low that monetary policy becomes ineffective in stimulating the economy.
Modern Monetary Theory: A controversial approach to macroeconomics that argues that governments can create as much money as they need to finance public spending without causing inflation, as long as they keep the economy running at full capacity.
Crowding out: A phenomenon in which government borrowing to finance public spending reduces private investment by increasing interest rates.
Debt monetization: A process by which the central bank creates new money to finance government debt, which can lead to inflation and currency depreciation.
Time inconsistency: A problem in monetary policy in which policymakers face incentives to renege on their promises to control inflation.
Unconventional monetary policy: A range of policy measures that supplement traditional monetary policy tools, such as quantitative easing, negative interest rates, and forward guidance.
Automatic stabilizers: Government policies that automatically adjust in response to changes in economic conditions, such as unemployment insurance or progressive taxation.
Interest rate targeting: Central banks use interest rate targeting as a monetary policy tool by setting short-term interest rates to influence economic growth, inflation, and unemployment. By lowering interest rates, central banks aim to stimulate borrowing, investment, employment, and consumer spending.
Reserve requirements: Reserve requirements involve setting minimum amounts of cash that banks must hold as deposits with the central bank to lend or to safeguard against risk. By raising reserve requirements, central banks can reduce the money supply in circulation and minimize inflation.
Open market operations: Under open market operations, central banks buy or sell government securities to control money supply in the economy. If the central bank buys more securities, this injects more money supply into the economy, leading to economic growth, while selling securities reduce the money supply and balance inflation.
Quantitative easing: Quantitative easing is an unconventional monetary policy tool used by central banks to boost economic activity during rough economic times. The central bank buys long-term government or corporate bonds to inject cash into the economy and stimulate credit availability.
Discount rate: The discount rate is the interest rate at which central banks lend to commercial banks during financial emergencies such as a bank run. By charging a high discount rate, central banks reduce the supply of money and minimize the risk of inflation.
Capital controls: Capital controls limit the amount of money that can flow into or out of a country. By controlling capital inflows or outflows, central banks can manage currency exchange rates, prevent currency devaluations, and stabilize the economy.
Price level targeting: Price level targeting is a monetary policy tool that aims to stabilize inflation rates by maintaining a consistent price level. Central banks set policies focused on stabilizing nominal GDP growth to prevent inflation overshooting.
Exchange rate targeting: Exchange rate targeting is a monetary policy tool that central banks use to manage foreign exchange rates. By buying or selling foreign currencies or influencing capital flows, central banks can maintain a stable exchange rate to boost international trade or to keep inflation under control.
Inflation targeting: Inflation targeting is a monetary policy tool that central banks use to maintain a consistent rate of inflation. Central banks set a target inflation rate and then adjust monetary policy settings to achieve their targets.
Forward guidance: Forward guidance is a tool used by central banks to communicate future policy changes to the market. By providing guidance on future interest rates and other policy tools, central banks can lead investors to make better and informed financial decisions.
Quote: "...to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rate of inflation)."
Quote: "Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies."
Quote: "Today most central banks in developed countries conduct their monetary policy within an inflation targeting framework..."
Quote: "A third monetary policy strategy, targeting the money supply, was widely followed during the 1980s..."
Quote: "The tools of monetary policy vary from central bank to central bank..."
Quote: "Interest rate targeting is generally the primary tool..."
Quote: "Interest rates affect general economic activity and consequently employment and inflation..."
Quote: "Monetary policy affects the economy through financial channels like interest rates, exchange rates, and prices of financial assets."
Quote: "This is in contrast to fiscal policy, which relies on changes in taxation and government spending..."
Quote: "In developed countries, monetary policy is generally formed separately from fiscal policy..."
Quote: "Modern central banks in developed economies being independent of direct government control and directives."
Quote: "How best to conduct monetary policy is an active and debated research area..."
Quote: "Interest rates affect general economic activity and consequently employment and inflation via a number of different channels..."
Quote: "...indirectly via open market operations."
Quote: "Other policy tools include communication strategies like forward guidance..."
Quote: "Monetary policy is often referred to as being either expansionary (stimulating economic activity and consequently employment and inflation)..."
Quote: "Monetary policy is often referred to as being either contractionary (dampening economic activity, hence decreasing employment and inflation)..."
Quote: "...and are also an important determinant of the exchange rate."
Quote: "How best to conduct monetary policy is an active and debated research area, drawing on fields like monetary economics as well as other subfields within macroeconomics."