Monetary policy means the procedure by which the monetary expertcontrols the supply of money in an economy. Generally, it is Central Bank that performs the task by making adjustments in the cash available for increasing the growth of the economy, stabilizing the costs and exchange rate and endorses employment.
Techniques For Controlling Monetary Policy
One of the common processesused for controlling the monetary policy is by raising or decreasing the monetary base of the country. Generally the central banks perform this by purchasing or selling the bonds for cash which is kept asidein Central Banks. According to this procedure, liquidity in an economy is raised. The other way of controlling the supply of money is to bind the assets amount that the banks have to leave with Central Banks in the form of reserves. By raising the requirement of reserve ratio, the banks have few liquid assets accessible for the loans and illiquid assets like the mortgages.
Window lending is another method for controlling the monetary policy. Central Banks permits the commercial banks to exchange reserves for the collateral. It makes the liquidity accessible for them in case of emergencies. You will also find a currency board or an alternative of pegging the monetary base of the country to another. As for any alteration in the quantity of cash inflow there should an equal alteration in the quantity of the overseascurrency reserves.
Effect on currency
Economic policy is classified into two groups named as contractionary and expansionary. Usually, the Central Banks adopt an expansionary economic policy for increasing the economic growth. With high liquidity, there is large amount of cash for spending around the customers for accessing. On the contrary, raising the amount of cash in circulation loses the value as its buying power becomes smalleras the cost of services and goods increases. On the contrary, a contradictory economic policy has a strong effect on the currency. Generally, it is distinguished by the high rate of interest which encourages the investors to park the assets the nation as the rate of interest promise high returns to the investments.