Monetary Policy

Monetary policy is a very important tool of the Government of a country which uses this particular tool in an attempt to influence the national economy. By implementing the monetary policy, a Government controls the availability of money in the country and also attempts to obtain its political goals through the process. Some of the main issues that a Government needs to address under its monetary policy are: economic growth of the nation, unemployment rate of the society and balance of external payments.

Monetary Policy and Role of Central Banks

Central bank of a nation is usually plays the main administrative role in case of implementing the monetary policy. Example of some of the central banks can be: Reserve Bank of Australia (RBA), Federal Reserve Bank in the United States and Bank of England.

In the modern economy, the central bank of a country plays such an important role in terms of implementing the monetary policy that sometimes you will find experts referring to the actions taken by a central bank (say for example the steps taken by the Reserve Bank of Australia) to control money supply in the market as the monetary policy of a country. However, it is important to keep in mind that both the Government and the central bank play vital roles to successfully implement the monetary policy in a country.

Monetary Policy and Inflation

Inflation in a country is very much linked with its monetary policy. As it was mentioned previously, a Government or the central bank tends to control the money supply in a country’s economy through their monetary policy. If the economy gets flooded with too much money than it can lead to high inflation rate, something that is not considered good. On the other hand, if the money supply grows too slow then the economic itself slows down, which is also not good for a country’s economy either. Considering these issues, it is important for the Government and Central Bank of a country to make sure that a carefully developed and reviewed monetary policy is being implemented to make sure that it helps the national economy to obtain an acceptable inflation rate as well as works in favour of the country’s economic growth.