√ Definition of Monetary Policy, Objectives, Types, Indicators and Instruments
Definition of Monetary Policy, Objectives, Types, Indicators and Instruments – In this discussion, we will explain about monetary policy. Which includes the definition, objectives, types, indicators and instruments of monetary policy with complete and easy-to-understand discussion.
Definition of Monetary Policy, Objectives, Types, Indicators and Instruments
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Definition of Monetary Policy
Monetary policy or what is commonly referred to as monetary policy is a policy carried out by the government or monetary authorities by using changes in the amount of money paid in circulation (money supply) and interest rates (interest rates) to influence the level of aggregate demand (aggregate demand) and reduce volatility in the economy. Nanga, 2005:180
Monetary Policy Objectives
A monetary policy has an ultimate goal, namely a macroeconomic condition to be achieved. The goal is not the same from one country to another and also from time to time.
Monetary policy objectives are not static, but have a dynamic nature because they are often adjusted to the needs of a country's economy. However, in many countries, four things are determined as the main objectives of monetary policy, namely:
- Economic growth and income distribution
- Job opportunities
- Stable prices
- There is a balance of payments
Types of Monetary Policy
In monetary policy, there are two types of policies that are expansive in nature and monetary policy that are contractionary in nature, as follows:
Expansionary monetary policy (Easy money policy)
Namely to increase the amount of money in circulation, this policy was implemented as a step in overcoming it unemployment and increase people's purchasing power (public demand) when the economy is experiencing the effects of a recession or depression.
Contractionary monetary policy (tight money policy)
That is to limit or reduce the amount of money in circulation, this policy is implemented when the economy is experiencing inflation.
Monetary Policy Indicators
A monetary policy has indicators, namely interest rates and or money supply. According to Pohan (2008), the two indicators have a function, namely as intermediate targets and indicators, the following is an explanation:
Interest Rates
Monetary policy that utilizes interest rates as an inter-target will determine the ideal interest rate as a driving force for investment activity, if interest rates If interest rates experience an increase that exceeds the specified level, the central bank will quickly carry out a monetary expansion so that interest rates fall to a certain level determined.
Money Supply (Monetary Aggregate)
Monetary policy that uses aggregate monetary or money supply is a medium target that has a positive effect in the form of stable prices.
Monetary Policy Instruments
According to Pohan (2008) there are four instruments that underlie monetary policy, namely:
Mandatory Reserve (Reserve Requirement)
Is a central bank regulation that requires banks to maintain some liquid assets (reserve) for a certain percentage of their current liabilities. The smaller the percentage, the greater the bank's ability to use its reserves to issue larger loans to the public.
But on the contrary, the greater the percentage, the less the bank's ability to issue loans. Therefore, bank loans are one of the factors that influence the amount of money in circulation.
Open Market Operations (OPT)
Open market operations are the buying and selling of securities carried out by the central bank. OMOs are implemented to influence rupiah liquidity on the money market, which will also affect interest rates.
Discount Facility
The discount facility is a central bank monetary policy aimed at influencing the money supply through determining discounts on central bank loans to commercial banks. By setting a high discount rate, the hope is that banks will reduce it demand for credit and the central bank will reduce the money supply, as well on the contrary.
Foreign Exchange Interventions
Is a central bank policy that aims to influence the amount of money in circulation or liquidity in the money market by buying and selling foreign exchange (foreign exchange) or foreign exchange reserves.
Susan's morals
Is an appeal that is not binding in nature, but is used as a credible institution. Central bank appeals that have a very good effect on monetary policy.
Thus has been explained about Definition of Monetary Policy, Objectives, Types, Indicators and Instruments, hopefully can add to your insight and knowledge. Thank you for visiting and don't forget to read other articles.
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