Monetary Policy
Monetary policy is the monitoring and control of money supply by a central bank, such as the Federal Reserve Board in the United States of America, and the Bangko Sentral ng Pilipinas in the Philippines. This is used by the government to be able to control inflation, and stabilize currency. Monetary Policy is considered to be one of the two ways that the government can influence the economy – the other one being Fiscal Policy (which makes use of government spending, and taxes).[1] Monetary Policy is generally the process by which the central bank, or government controls the supply and availability of money, the cost of money, and the rate of interest.
Types of Monetary Policy
[edit]Inflation Targeting
Inflation targeting revolves around meeting publicly announced, preset rates of inflation. The standard used is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States.[2] It intends to bring actual inflation to their desired numbers by bringing about changes in interest rates, open market operations, and other monetary tools.
[edit]Price Level Targeting
Price level targeting involves keeping overall price levels stable, or meeting a predetermined price level.[3] Similar to inflation targeting, the central bank alters interest rates to be able to keep the index level constant throughout the years. Flourishing and advanced economies opt not to use this method as it is generally perceived to be risky and uncertain.
[edit]Monetary Aggregates
This approach focuses on controlling monetary quantities. Once monetary aggregates grow too rapidly, central banks might be triggered to increase interest rates, because of the fear of inflation.[4]
[edit]Fixed Exchange Rate
Fixed exchange rate is also often called “Pegged Exchange Rate”. Here, a currency’s value is pegged to the value of a single currency, or to a basket of other currencies or measure of value, such as gold. The focus of this monetary system is to
Types of Monetary Policy
[edit]Inflation Targeting
Inflation targeting revolves around meeting publicly announced, preset rates of inflation. The standard used is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States.[2] It intends to bring actual inflation to their desired numbers by bringing about changes in interest rates, open market operations, and other monetary tools.
[edit]Price Level Targeting
Price level targeting involves keeping overall price levels stable, or meeting a predetermined price level.[3] Similar to inflation targeting, the central bank alters interest rates to be able to keep the index level constant throughout the years. Flourishing and advanced economies opt not to use this method as it is generally perceived to be risky and uncertain.
[edit]Monetary Aggregates
This approach focuses on controlling monetary quantities. Once monetary aggregates grow too rapidly, central banks might be triggered to increase interest rates, because of the fear of inflation.[4]
[edit]Fixed Exchange Rate
Fixed exchange rate is also often called “Pegged Exchange Rate”. Here, a currency’s value is pegged to the value of a single currency, or to a basket of other currencies or measure of value, such as gold. The focus of this monetary system is to