Monetary Economics/Monetary Policy

Introduction to Monetary Policy

Differentiation: Financial Policy vs. Monetary Policy

We seldom get to hear something about monetary policy in the media, but we often hear news about politicians’ current decisions on financial plans and similar things. It must be said that monetary policy and financial policy are very different topics: financial policy deals with the budget of the state, how funds should be allocated and what they should be used for. In contrast to that monetary policy deals with the amount of money in circulation and its value.

Central Banks: Implementation of Monetary Policy

Monetary policy is conducted by central banks. These are institutions that have the exclusive right to issue the money of an economy. As a consequence the central bank controls the amount of money in circulation and therefore its value. That is, what monetary policy is basically about, maintaining the value of the currency, also called price stability. In order to do so, central banks use monetary instruments that allow them to control the money supply. What makes monetary policy interesting and also fairly difficult is its effect on the economy in the short-run because monetary policy, can influence the short-term fluctuations of economic output. That is why many central banks not only have the aim to maintain price stability but also to support their economy, if possible.