Monetary policy in developed economies must serve the function of stabilization and maintaining proper economic equilibrium. However, in the case of developing countries, monetary policy must be more dynamic in order to meet the needs of an expanding economy by creating favorable conditions for economic growth. Monetary policy can be classified as strategic, intermediate, or tactical. The following tasks are critical when it comes to strategic or primary goals.
- Increased population employment; - Price level normalization; - Containment of inflationary processes; - Acceleration of economic growth; - Increase in production volumes; - Alignment (balancing) of the state's balance of payments.
Intermediate goals, on the other hand, are achieved by changing interest rates and the amount of money in circulation. It is thus possible to adjust the current demand for goods and to reduce (increase) the supply of money in this manner. The goal is to influence price policy, attract investment, increase employment, and increase output. At the same time, the conjuncture in the money (commodity) market can be maintained or revived.
Tactical objectives are of a short duration. Their mission is to expedite the achievement of more important - intermediate and strategic - goals:
- Controlling the supply of money; - Controlling the level of interest rates; - Controlling the exchange rate.
Monetary Policy Types
Each country determines its own monetary policy. It varies depending on external conditions, the state of the economy, production development, employment, and other factors. The types are distinguished as follows:
1. Soft monetary policy (also known as """"cheap money policy"") aims to stimulate various sectors of the economy by regulating interest rates and increasing the amount of money in circulation. The Central Bank conducts the following operations at the same time: - Executes transactions to purchase government securities. All transactions take place on the open market, and the proceeds are transferred to bank reserves and population accounts. Such actions allow for increased money supply and improved bank financial capacity. As a result, interbank loans are in high demand; - Reduces the rate of bank reservations, significantly expanding lending opportunities for various sectors of the economy; - Reduces the interest rate. As a result, commercial banks now have access to more profitable loan terms. Simultaneously, the volume of loans extended to the population on more favorable terms, as well as the attraction of additional funds in the form of deposits, has increased.
2. Rigid monetary policy (also known as ""expensive money policy"") aims to impose various restrictions on the growth of money in circulation with the primary goal of limiting inflationary processes. The Central Bank follows a strict monetary policy, which includes the following actions:
- Increases the maximum number of bank reservations. This results in a reduction in the growth of the money supply; - raises the interest rate. As a result, commercial structures are forced to halt the flow of borrowing from the Central Bank and limit the issuance of public loans. As a result, the growth of the money supply is suppressed; - Government securities are sold. At the same time, transactions occur on the open market as a result of population current accounts and commercial credit and financial organization reserves. As in the previous case, the result is a decrease in the volume of the money supply."""