Monetary policy describes the ways in which the central banks change the money supply in order to accomplish certain economic objectives. In the U.S. this is done by the Federal Reserve.
Intro to Monetary Policy
Frequently Asked Questions
What is monetary policy?Monetary policy is how central banks influence the economy by raising or lowering the money supply. This is in contrast to fiscal policy, which is how the government uses its taxes and spending to affect the economy.Learn More: What Central Banks Do
What are the tools of monetary policy?Monetary policy has a few main tools—reserve requirements, discount rates, open market operations (OMO), and quantitative easing (QE).Learn More: Market Operation and Its Effect on Money Supply
How does monetary policy affect markets?Monetary policy affects markets in many ways, however, two main ones include boosting or dampening the economy as a whole, and raising or lowering bond yields. First, as expansionary monetary policy can boost the economy as a whole, investments more sensitive to the business cycle will usually benefit and vice versa with contractionary policy. Secondly, monetary policy’s effect on interest rates causes yields to rise and fall, which changes the relative value of existing interest-bearing investments.Learn More: How Monetary Policy Affects Your Investments
What is the difference between expansionary monetary policy and contractionary monetary policy?Expansionary monetary policy is when a central bank increases the money supply which fights recessions and increases economic growth. Contractionary economic policy pulls money out of the economy in order to fight inflation.Learn More: Examples of Expansionary Monetary Policies
TaperingTapering is the process of gradually decreasing the size of an expansionary monetary policy. This can include any form of monetary policy but is most often applied to quantitative easing (QE).
Foreign Exchange ReservesForeign exchange reserves, also called Forex reserves, are stores of foreign currencies held by central banks. The central banks use these to purchase their own currency to carry out monetary policy.
M2M2 is one way to measure the money supply. It includes all cash and checking deposits, referred to as M1, as well as savings deposits, money market securities, and certificates of deposit (CD).
International Monetary Fund (IMF)The IMF is a multinational organization meant to promote economic growth, ensure the stability of the world financial system, and lower poverty. It offers grants, loans, and other financial assistance to countries to accomplish these goals.
Liquidity TrapA liquidity trap is when cash savings rates are high and interest rates are low. This combination makes it difficult for monetary policy to affect the economy.
Economic StimulusEconomic stimulus refers to policies undertaken by a government or central bank to increase economic growth and counter recession. These can be either fiscal or monetary in nature.
CurrencyA currency is anything that serves as a medium of exchange, a store of value, and a unit of account. Most countries have a standard currency to serve these functions in that country.
TrilemmaThe monetary policy trilemma is the inability to simultaneously have a fixed currency exchange rate, allow capital to flow in and out of a country freely, and maintain an autonomous monetary policy. A country can only have two of the above and the decision as to which two is a critical part of monetary policy.
Who Was Harry Dexter White?
Quantitative Tightening (QT)
The First Bank of the United States
Paycheck Protection Program Liquidity Facility (PPPLF)
Money Market Mutual Fund Liquidity Facility
Explore Monetary Policy
Should We Become a Cashless Society?
What Are the Top US Imports?
The Taylor Rule: An Economic Model for Monetary Policy
What Is the International Monetary Fund (IMF)?
M2 Definition and Meaning in the Money Supply
Demonetization: Meaning, Example, and How It Works
Import Substitution Industrialization (ISI) Defined, With Example
What Is a Fixed Exchange Rate? Definition and Examples
Narrow Money Definition vs. Broad Money, Qualifying Accounts
What Is a Liquidity Adjustment Facility (LAF) in Monetary Policy?
What Is a Trilemma and How Is It Used in Economics? With Example
Group of Seven (G7) Defined: Member Countries & How It Works
Monetarism: Printing Money To Curb Inflation
Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference?
Inflation and Economic Recovery
Okun’s Law: Economic Growth and Unemployment
A Look at Fiscal and Monetary Policy
Liquidity Trap: Definition, Causes, and Examples
Does Raising the Minimum Wage Increase Inflation?
Why These European Countries Don't Use the Euro
Who Decides to Print Money in Canada?
Fiscal Policy vs. Monetary Policy: Pros and Cons
How Do Fiscal and Monetary Policies Affect Aggregate Demand?
How Central Banks Control the Supply of Money
Keynesian Economics vs. Monetarism: What's the Difference?
Foreign Exchange Reserves: What They Are, Why Countries Hold Them
Why India's Central Bank Chief May Resign
Monetary Base: Definition, What It Includes, Example
Foreign Exchange Intervention Definition, Strategies, Goals
Mumbai Interbank Bid Rate (MIBID) Definition
Bank of England (BoE): Role in Monetary Policy
Open Market Operations vs. Quantitative Easing: What’s the Difference?
Common Equity Tier 1 (CET1) Definition and Calculation
How Central Banks Monetize Government Debt
Examples of Expansionary Monetary Policies
Asian Currency Unit (ACU)
10 Countries With the Highest Savings Rates
Pushing On A String
Flow of Funds (FOF) Accounts: Definition, Uses, Data ReportsÂ
Response Lag: What it is, How it Works, FAQ
What Is QE3 (Quantitative Easing)?
Who Regulates the Printing of Money in India?
What Central Banks Do
How Unconventional Monetary Policy Works
Macroeconomic Stabilization Fund (FEM)
How the Great Inflation of the 1970s Happened
What Is Basel I? Definition, History, Benefits, and Criticism
Understanding Austerity, Types of Austerity Measures & Examples
Stimulus Package: Definition, Benefits, Types, and Examples
Optimum Currency Area (OCA) Theory: Examples in Economics
Why Is the Chinese Yuan Pegged?
Currency: What It Is, How It Works, and How It Relates to Money
Moral Suasion (Jawboning): Definition, How It Is Used, Example
What Is a Stimulus Check? Definition, How It Works, and Criticism
Tapering: How, Why, and When the Fed Does It and Impact on Financial Markets
Bank for International Settlements: Overview, History
How the Bretton Woods System Changed the World
How Interest Rates Are Related to Open Market Operations