What is monetary policy?
1. Monetary policy is also a financial policy, which means that the People’s Bank of China achieves its specific economic goals and exercises various controls and supervision over money supply and credit policies, policies and measures. The essence of monetary policy is that a country adopts different policy trends of “tightening”, “easing” or “moderate” in terms of money supply according to the economic development in different periods.
2. Use various tools to adjust the money supply to adjust the market interest rate, affect the private capital investment by changing the market interest rate, affect the aggregate demand and affect the macroeconomic operation of various policies and measures. The four tools through which monetary policy adjusts aggregate demand are the required reserve ratio, open market operations and discount policies, and benchmark interest rates.
3. The nature of monetary policy—the way central banks control the money supply and the link between money, output, and inflation—is one of the most fascinating, important, and controversial areas of macroeconomics.
4. Fiscal policy consisting of government spending and taxation. Fiscal policy affects long-term economic growth primarily by affecting national savings and incentives to work and save. Monetary policy is carried out by the central bank, which affects the money supply. Adjusting the money supply through the central bank affects the interest rate and the degree of credit supply in the economy, and indirectly affects aggregate demand, so as to achieve an ideal balance between aggregate demand and aggregate supply towards a series of measures.
5. The goal of monetary policy adjustment is the money supply, that is, the total purchasing power of the entire society, in the form of cash and bank deposits in circulation by individuals, enterprises and institutions. Cash in circulation is closely related to changes in consumer price levels and is the most active currency. It has always been an important target of central bank attention and adjustment.
Types of Monetary Policy
1. Expansionary monetary policy. It refers to reducing the statutory deposit reserve ratio and lowering interest rates, which are then used to expand the scale of credit spending and increase the money supply in order to stimulate investment and consumption.
2. Tight monetary policy. It refers to raising the statutory deposit reserve ratio and raising interest rates, and then reducing the scale of credit expenditures and reducing the money supply, suppressing investment and consumption.
3. Prudent monetary policy. In terms of monetary policy measures, it is necessary to ensure the stability of the money supply or interest rates.
Limitations of monetary policy
1. If it is in a period of inflation, it is very effective to implement a tightening monetary policy. However, when the economy is in recession, if the expansionary monetary policy is implemented, the effect is very insignificant;
2. From the perspective of the measurement of the money market, it is very inconvenient to increase or decrease the supply rate of money. This supply rate must be controlled when the velocity of currency circulation remains stable or even constant;
3. If it is in the period of economic opening, monetary policy will also be affected by many aspects, and the most affected is the international flow of funds. For example, when a country implements a tightening monetary policy, interest rates rise rapidly. If foreign capital flows in again, the interest rate will fluctuate greatly, so that both exports and imports will be adversely affected to a certain extent.
