With the employment of the monetary policy, financial accounts with regard to the Consumer Price Index (CPI) can be either weakened or strengthened. Prices can be substituted, income will be affected, and overall, the arrangement of the foreign exchange market will be modified. Consequently, monetary authorities of sorts can, then, begin looking at programs that can aid contraction or expansion. Granted certain restrictions are set, traders can expect improvements in exchange rates. However, is the implementation of anticipated and unanticipated changes really a good thing?
Monetary Policy Defined
Types of monetary policy:
- Fixed exchange rate - meant to identify a currency’s spot price
- Gold standard – meant to lower inflation rates for gold
- Inflation targeting – meant to identify changes in a given rate in the CPI
- Mixed policy – meant to impact CPI and unemployment
- Price level targeting –meant to identify a CPI number
Monetary policy, be it contractionary or expansionary, is the process that describes a country’s monetary control over money supply. It targets inflation rates and interest rates to ensure trust in the currency and stability of its value. Moreover, it is meant to play a significant role in combating low unemployment rates, contributing to economic growth, and predicting exchange rates.
Contractionary & Expansionary: What’s the Difference?
Contractionary monetary policy is used to slow inflation rates to avoid the deterioration of asset values and distortions. It raises rates to meet a target while refusing to force authorities into a recession. Expansionary monetary policy, on the other hand, is implemented to have a defense against unemployment. Since it hopes that authorities will be enticed by presenting them easy credit, the action plan involves lowering interest rates.
Criticisms Regarding the Monetary Policy
Criticisms regarding the monetary policy have been voiced out several times. As per Anna Schwartz, Milton Friedman, and a number of other monetary economists, with it, a probable downfall of the monetary supply is a possibility. Also, according to Paul Volker, chairman of the US Federal Reserve, said that its implementation is rather impractical since the relationship between monetary aggregates (e.g. savings deposits, physical cash, and money market shares) and macroeconomic variables (e.g. Gross Domestic Product, unemployment, and inflation) can be unstable.
Internationally Speaking
Since there are interdependent open countries such as England and Scotland, questions about how the monetary policy will be implemented have emerged. By taking into account devaluations and strategic interactions, it can result to international feuds. Thus, whether inflation and domestic output gaps are affected, it remains to be argued that it will only complicate different financial markets’ conditions.
References: Technical points have been taken from MTrading.in – an Indian Forxer broker.
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