Monetary policy - direction of the economy through
supply & price of money.
It was believed until Keynes that low interest rates stimulate economy. Thus
they varied a bit. UK was in gold standard - no change in money supply. 1930
interest + investment low, Keynes said liquidity trap. After war his policies
where used, but interest still low, because large savings and govn borrowing,
socialist govn thinking fiscal policy is fairer and didn't like to punish govn
In 1950s and 1960s
would decrease security price making institutions unwilling to sell them and
choking off investment. Liquidity control was top priority. Main policy fiscal,
monetary for fine tuning.
After 1970 rise of monetarist
lowered - resulted in inflation. Interest left for market forces. 1979
conservatives started to strict money supply. Main policy was and is now monetary. Too much is expected from it.
c.Interest rates (decreasing might not
increase investment whereas raising locks up funds, because most investment
decisions are non-marginal. Time also varies. Government pays interest on
national debt. Also the hot money flows in)
d.Open-market operations (sale of govn
securities). The general public must buy them because banks regard them as
e.Funding (converting short-term debt into
f.Special directives and deposits (damage
relationships between the Bank and commercial banks, very effective)
g.Moral suasion (in USA)
policy targets (e.g. liquidity of banks)
targets (money stock (if raises the velocity can fall!), volume of credit,
interest rates, exchange rate, expenditure in the economy)
demand changes , that will directly lead to
options - inflation economic growth etc.