The instruments of monetary policy

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2018-03-28 12:50:09

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Monetary policy is directed on implementation of activities undertaken by government in the sphere of monetary and credit relations, with the aim of regulating economic processes. Coordinator of its implementation is the Central Bank. The policy itself is carried out in two stages. The first stage – the Central Bank acts on the parameters of the monetary sphere. The second phase – correct parameters are passed in the manufacturing sector. The result of effective execution of these stages will serve as the sustainability of economic growth, relatively low unemployment rate, stability of the price level and the characteristic balance of state balance. The priority in achieving improvement in the economic status of any country is stability in the price level.

The Main instruments of monetary policy should impact all financial processes in the state as a direct (or administrative) and indirect (or economic) instruments. This must be reflected in the state control of such a key financial indicator, as the balance of payments.

The Administrative monetary policy tools are regulations, directives and instructions must come from the Central Bank and regulate the limits on interest rates and lending. Control over the interest rate limit by using the limit definition of the value of loan interest and Deposit interest rates and rates on savings deposits.

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Limiting the volume of transactions for loans provides for the establishment of upper limits of credit emission. This concept is known under the name of “credit limit”. In other words, the total amount of loans provided by the banking sector, this determines the loan ceiling. The same restrictions on the volume and rate of growth of loans are for all commercial banks. Sometimes the credit limit is set only for certain sectors of the economy and is called selective credit control. This method of regulation include the capping of limits for consideration of bills and the limitation of credit for consumption.

Direct instruments of monetary policy is quite effective during the crisis of the credit system, as well as with underdeveloped domestic financial market. The main drawback is the facilitation of outflow of cash in “shadow” and abroad.

Indirect instruments of monetary policy include: changes in the discount rate, setting the volume of mandatory reserves, and the implementation of open market operations.

One of the first methods involved in the regulation of monetary relations, is considered to be a change in the discount rate. It consists in influencing the Central Bank on the liquidity of other banks and common monetary base. Thus, under the liquidity necessary to understand the ability of banks of different ownership forms in a timely manner to repay all its financial obligations.

The Main tools of monetary policies to control Bank liquidity, and include determining the amount of required reserves. The reserves are necessary to guarantee the payment of deposits of customers in case of bankruptcy of the Bank. The Central Bank sets certain regulations for obligatory reserves. For example, to increase savings, the Central Bank set lower rates for deposits with a small term Deposit and higher – for demand deposits.

Described indirect instruments of monetary policy have a significant impact on the scale and structure of credit operations. Their advantage is the effective impact on the object of regulation, the lack of appearances under their influence disparities in economic processes.

Based on the above, we can conclude that all monetary policy instruments should serve as levers of economic influence to achieve a positive macroeconomic effect.


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Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

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