Money is not an object and is in fact an imaginary concept. For instance, cryptocurrencies are digital and cannot be physically printed. Austrian economist Friedrich August Von Hayek questioned why the state should retain the right to print and regulate money, concluding that "it has not helped to give us a better or worse money than we would have". As Hayek observed, even thinking of money as a noun is misleading. It would be more useful for explaining the concept of money if money were an adjective describing a property that different things can dominate to varying degrees.
Cryptocurrencies have the same characteristics as traditional currencies, with a certain level of volatility, and are used as a medium of exchange, a unit of measurement and a store of value. Cryptocurrencies actually function as a medium of exchange. The history of money also includes examples of non-artificial money. For centuries, a "fictitious" money has existed, but only served as a unit of account and not as a medium of exchange, unlike today's cryptocurrencies. While digital and fiat currencies have similar characteristics, fiat currencies have features that cryptocurrencies lack. Central banks set monetary policy by issuing interest-bearing liabilities (reserves) and policy them in terms of the risk-free interest rate.
Monetary Policy is the set of rules used by a country's central bank to control the money supply and encourage economic growth. Monetary policy is used to regulate interest rates and change central bank reserve requirements.
What Are the Types of Monetary Policy?
There are two types of monatery policy:
- Expansionary monetary policy
- Contractionary policy
Expansionary Monetary Policy
Expansionary monetary policy is a macroeconomic method that aims to stimulate the economy by increasing the money supply. In times of economic stagnation or slowdown, expansionary policy increases economic activity and lowers interest rates. This leads to an increase in consumer spending and borrowing. Expansionary monetary policy supports economic growth and reduces unemployment. It also helps to benefit the economy through currency devaluation. However, monetary policy leads to higher inflation.
Contractionary Policy
Contractionary monetary policy is a tool used to regulate a country's economy and is usually implemented to reduce the risk of an economic slowdown or inflation. Central banks can increase interest rates charged to commercial banks to reduce the money supply. This makes it harder for commercial banks to offer higher interest rates to their customers, which leads to a reduction in the money supply. In this way, the inflation rate can be reduced or kept constant.
Contractionary policy is preferred to slow economic growth, to maintain slow growth rates and to reduce inflation, in which the prices of goods and services are raised, in other words, buying power is reduced. Contractionary policy raises interest rates and limits the money supply.
How Is Monetary Policy Process?
Monetary policy controls the amount of money in a country's economy and the supply of new money. This is important because economic statistics such as a country's Gross Domestic Product (GDP), inflation rate and sector-specific growth rates influence monetary policy strategies. The central bank can regulate the interest rates it charges for lending to the country's banks. When interest rates rise or fall, financial institutions and businesses adjust the interest rates on loans for their customers.
In addition, the central bank can buy and sell government bonds, target exchange rates and change the amount of cash banks are required to hold as reserves. This can be used to control the money supply and liquidity in the market. For instance, by buying government bonds, the central bank can raise interest rates by withdrawing money from the market. Similarly, by increasing banks' cash reserves, the central bank can reduce the money supply and keep inflation under control.
Monetary policy is crucial for maintaining economic stability. When managing monetary policy correctly, a country can maintain price stability, reduce unemployment, and stimulate economic growth. However, wrong monetary policy decisions can lead to inflation, unemployment, and other economic problems.
What Are the Goals of Monetary Policy?
- Inflation
- Unemployment
- Exchange rates
Inflation
Contractionary monetary policy targets high levels of inflation. It aims to reduce inflation and the level of money in the economy.
Unemployment
Expansionary monetary policy aims to reduce unemployment through high money supply, favorable interest rates, and expansion of the labor market.
Exchange Rates
Monetary policy affects exchange rates. An increase in the money supply causes the domestic currency to become cheaper than the foreign currency.
What Are Monetary and Fiscal Policy?
Monetary policy is used by the country's central bank to keep the economy stable, reduce unemployment, maintain the value of money and sustain economic growth. It affects borrowing, spending and saving rates.
Fiscal policy, on the other hand, is not used by central banks but by the government. It provides money directly or indirectly to the economy in order to increase spending and economic growth.
