What is monetary policy?

Within the economía we find ourselves with a discipline whose function is to control certain monetary factors in order to achieve economic stability. This is the work object of monetary policy, also known as financial policy.

Monetary policy concept

The concept of monetary policy is understood as the set of objectives defined with the intention of obtaining stable economic growth. Thus, financial policy includes all that set of actions aimed at adjusting the money of the same market.

As we can see through its name, monetary policy works through a few banks, the central banks. These banks are responsible for the money and its interest rate, that is the main task for the monetary authorities.

Expansive and restrictive monetary policy

When we talk about monetary policy we find two particular situations. On the one hand, with the expansive monetary policy, which is the one in charge of reducing the interest rate. At the same time, this policy is also responsible for increasing the amount of money that is in circulation at all times. On the other hand, we find the restrictive monetary policy, as its name indicates, it is the one that is responsible for reducing the amount of money that is in circulation at any given time. Therefore, it is in charge of raising the interest rate.

What is monetary policy in charge of?

Among the objectives of monetary policy we mainly find the following functions:

  • First of all, we highlight the inflation rate, since the role of the monetary policy agents is that said rate remains low and stable. This is what allows the same product, good or service to have a longer economic life. Therefore, the purpose of monetary policy is to contain a price and therefore the value that money has at all times.
  • In line with the previous point, to achieve these objectives, monetary policy requires a high employment rate, and this is another of its notable functions. For this reason, monetary policy has among its main activities the setting of wages.
  • Third, monetary policy, in order to prevent the aforementioned inflation, should always try to ensure that an equilibrium prevails in the balance of payments.

As a consequence of the comments, we understand that monetary policy is one that must ensure economic growth. Furthermore, according to the ECB's objective, inflation should remain at an average of 2%, but always in the medium term.

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