Concept of Monetary Policy

Monetary policy is one of the successful macro-economic policies. It has important role for in general economic management and growth. Monetary policy is the work out of the central bank to control over the money supply as a tool for achieving the objectives of universal economic policy. Monetary policies attempt to make different types of good quality economic activities mainly through money and credit supply as well as interest rate. Similarly, monetary policy will be more successful through the period of galloping or hyperinflation.

The process, formulation, completion and estimate of monetary policy are calculated by the central bank under the rules and directives of government of the state as well as increase and development of an economy. Therefore, monetary policy is adopted to achieve different types of economic objectives like accelerated economic growth and progress, full service, price constancy, economic constancy etc. So monetary policy can be defined as the management of the expansion and contraction of quantity of money in movement. So we can say, monetary policy can change quantity, quality, availability and cost of money as well as rate of interest, investment, service, output, revenue etc. for the balance economic growth and development.

According to Edward Shapiro “Monetary policy is the exercise of the central bank’s control over the money supply as an instrument for achieving the objective of general economic policy”. In the words of D.C. Rowen, “The monetary policy is defined as discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest, and (c) the availability of money”. According to RP Kent monetary policy is, “The management of expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment”.

Hence, we can say monetary policy is a purposeful effort of central bank to control monetary policy and ratio of credit in an economy for achieving definite objective like economic stability and best allocation of resources. So monetary policy is measured as an important tool of the government to plan various types of economic policies. The main instruments of monetary policy and bank rate, open marketplace operation and required reserve ratio.

Generally, there are two types of monetary policies according to economic arrangement of an economy i.e. expansionary monetary policy and concretionary monetary policy.

(A)  Concretionary Monetary Policy

The usefulness of concretionary monetary policy is appeared through the time of hyperinflation, where prices are rising very rapidly and most of the economic variables start to fall. In such state, monetary policies are formulated to manage money supply and expenditure pattern by lowering the insist for consumption and investment some techniques for concretionary monetary prices are:

(a)  Selling the bonds, securities and treasury bills in the open market.

(b)  Increasing the discount rate.

  • Rising the minimum required reserve ratio.


(A)  Expansionary Monetary Policy

The monetary policy, which normally expands money supply and credit in an economy are called expansionary monetary policy. Usually, to increase various economic activities in increasing countries such as trade, commerce, industry and infrastructure development; the expansionary monetary policies are applied some techniques for expansionary monetary policy are:

(a)  buy of bonds and funds bills in open market.

(b)  Lowering the diminution rate or bank rate.

(c)  Lowering the requisite reserve ratio.


Hence, the monetary policy used by the central bank to fulfill the objective of country’s economic policy which is related to supply of money, credit creation, interest rate, exchange rate etc.


One thought on “Concept of Monetary Policy”

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