Finance Dictionary
Monetary Policy
Definition
The policy adopted by the monetary authority of a country that controls either the interest rate payable on very short-term borrowing or the money supply.
Deep Dive
Monetary policy refers to the strategies implemented by a country's central bank or monetary authority to manage the money supply and credit conditions, primarily to achieve macroeconomic goals such as controlling inflation, promoting maximum employment, and ensuring stable economic growth. The primary tools used include adjusting benchmark interest rates, engaging in open market operations (buying or selling government securities), and setting reserve requirements for banks.
Examples & Use Cases
- 1The Federal Reserve raising the federal funds rate to cool down an overheating economy and combat high inflation
- 2A central bank implementing quantitative easing by purchasing government bonds to inject liquidity and stimulate lending during a recession
- 3Reducing the reserve requirement for banks to encourage more lending and economic activity.
Related Terms
Fiscal PolicyInterest RatesInflationCentral BankMoney SupplyQuantitative Easing