The state economy is developing largely due to the implementation of monetary policy by the country's financial authorities. What is its essence? Which of her methods are the most common?
What is the essence of monetary policy?
The term "monetary policy" is usually considered in the context of the activities of the Central Bank of the state or other structure that performs the functions that correspond to the Central Bank. In particular, such as:
- regulation of the activities of subjects of the financial system, credit market;
- licensing of commercial banks;
- inflation management;
- implementation of monetary policy;
- Assistance in managing the state budget capital.
Another name for this concept is “monetary policy”. The activities of the Central Bank and similar structures that carry it out have certain goals. Consider what they may be.
Monetary policy objectives
The key objectives of monetary policy, in general, correspond to the functions of the Central Bank of the Russian Federation, which we mentioned above. It is about such goals as:
- containment of excessive inflation;
- ensuring social protection of citizens;
- capitalization management of key sectors of the economy;
- ensuring the optimal balance of payments of the national economy.
These goals are set by the Central banks of most states, including the Bank of Russia. It will be useful to consider the main approaches to classifying such a direction of activity of the financial authorities of the country as monetary policy. In this case, its goals may be the same - in accordance with the list considered by us.
Approaches to the classification of monetary policy
Experts distinguish 2 main types of monetary policy:
- conservative;
- liberal.
The first type of monetary policy is aimed at implementing measures that regulate the work of financial institutions - private and public, and involve limiting the dynamics of credit operations. Thus, the Central Bank can, by setting a high key rate, stimulate a similar increase in lending conditions by private financial institutions.
In this case, the specific objectives of monetary policy are achieved. Such as, above all, lower inflation, as well as ensuring a positive balance due to indirect incentives to reduce imports. The type of monetary policy under consideration also implies an increase in the tax burden on enterprises, a reduction in budget expenditures, and optimization of import substitution.
Liberal monetary policy involves stimulating credit market growth, reducing control over capital turnover in the economy, tax rates, and interest on loans. By lowering the key rate, the Central Bank can stimulate the implementation of similar actions by commercial banks.
The corresponding monetary policy aims, as a rule, as follows:
- increase in capitalization of the economy,
- stimulation of business activity ,
- optimization of the balance of payments - but due to increased exports.
What determines the state’s choice of a particular type of monetary policy? How are the priority objectives of the monetary policy of the central bank determined?
As a rule, this depends on the current level of stability of the financial system of the state, as well as the dynamics of the development of the country's economy as a whole. If the national economy is developing, then for the Central Bank it may be acceptable to choose a liberal strategy: it, as a rule, helps to activate investments, stimulates business activity in the conditions of unoccupied market segments.
In the event that a crisis arises in the economy , the goals of the monetary policy of the state may change. In this case, there may be a need to reduce inflation. As we noted above, conservative monetary policy contributes to this goal. Its goals, therefore, largely reflect the economic situation in the state. If the national economy is developing dynamically - monetary policy may be characterized by some signs, with crisis trends - by others.
Another common criterion for classifying monetary policy is scale. So, total and selective methods of economic regulation are distinguished. Consider their features in more detail.
The scale of monetary policy
First of all, it is worth noting that both types of monetary policy studied above, conservative and liberal, can be either total or selective. The difference between the considered varieties of approaches to managing the financial system is thus determined by the extent of the jurisdiction of decisions taken by the Central Bank.
So, if the Central Bank implements a total monetary policy, then its orders apply to all credit and financial institutions operating in the state. The goals and methods of monetary policy can in this case be related to the need to stimulate the development of key sectors in the economy, and modernize the state banking infrastructure.
The selective policy of financial institutions involves the extension of the jurisdiction of decisions taken by the Central Bank to a limited number of financial institutions. So, the Central Bank, implementing a selective policy, can:
- set limits on settlements;
- determine lending rates;
- establish individual performance criteria for commercial financial organizations.
In this case, the purpose of the Central Bank may be to optimize specific elements of the credit system of the state, improve the payment infrastructure, improve the standards in accordance with which various payment transactions are carried out.
In practice, the goals and objectives of the monetary policy of the state, that is, the Central Bank or similar institutions, change quite often. This is due to constant changes in economic processes within the state and beyond, with the influence of socio-political factors, technological progress. Thus, the Central Bank can regularly use all of the noted types of monetary policy - and, in different combinations and priorities.
Of course, in certain fairly long periods, the state can choose priority methods of managing economic processes and to a lesser extent use alternative methods. But with a significant change in the external environment, the influence of political factors, the Central Bank may revise its own approaches to the implementation of monetary policy.
It will now be useful to consider the specific tools by which the Central Bank regulates economic processes in the country.
State monetary policy instruments
Modern economists distinguish the following list of the main tools in question:
- setting standards for reserves of commercial banks;
- participation of the Central Bank in transactions on stock exchanges;
- setting a key rate;
- regulation of the activities of commercial credit organizations.
We will study them in more detail.
Reserve requirements for commercial banks
The first instrument from the list considered above is considered one of the key, as it allows the Central Bank to have a significant impact on the ratio of capital supply and demand in the state economy. The fact is that the volume of own reserves of a commercial financial institution directly determines the capabilities of the bank acting as the subject of lending. If the requirements set by the Central Bank for the corresponding resource are high, then the activity of banks in the corresponding segment of the financial market is reduced. As a result, the capitalization of the economy in the real sector is decreasing, however, it may increase in terms of capital intensity of the financial sector, and deposits of citizens.
Tighter requirements for reserves of commercial banks can help reduce inflation and achieve other monetary policy objectives that require a conservative approach. Is the tool in question effective in terms of solving strategic problems in the economy?
Among experts, opinions on this matter are different. Some analysts believe that changing the standards regarding reserve requirements should be a temporary measure, others believe that the Central Bank of the Russian Federation should regularly use the appropriate tool - especially often in times of crisis and the uncertainty of various processes in the national economy.
Participation of the Central Bank in operations on stock exchanges
The next common tool for monetary policy of the Central Bank is the regulation of transactions on stock exchanges. Relevant financial institutions are open trading sites. Including those that involve transactions on the sale of securities issued by the state, as well as the largest enterprises that operate in the country.
In this case, the Central Bank can be an active player in the market, buying or selling certain types of securities. As a rule, the Central Bank is involved in transactions that reflect the turnover of government bonds. If he buys them, this indicates that the monetary policy pursued by him pursues those that characterize a liberal approach to regulating the economy. That is, the state or the largest companies, having received capital from the Central Bank, can send it to invest in new projects (budget, commercial), to stimulate the development of certain industries.
In turn, the sale of securities may indicate that the objectives of the monetary policy of the Central Bank are related to the implementation of a conservative approach to managing economic processes - since in this case the market capitalization is reduced.
Key rate setting
The next instrument of the Central Bank is the establishment of a key rate. This indicator, as we noted above, predetermines lending conditions in the market as a whole.
Thus, the high key rate of the Central Bank of the Russian Federation may indicate that the objectives of the monetary policy of the Bank of Russia are to reduce the dynamics of capitalization of certain sectors of the economy through borrowed funds, as well as reduce inflation. At the same time, the high key rate of the Central Bank, as a rule, stimulates the attraction of citizens' money to banks in the form of deposits - at a high percentage. As a result, the capitalization of, in turn, the financial institution is growing.
Regulation of financial operations of commercial banks
Another major direction of the state’s monetary policy is regulation, setting standards for the work of commercial banks. It is carried out due to the fact that the financial authorities need to ensure the stability of the banking system as one of the key resources for the implementation of monetary policy.
Commercial credit institutions play the role of the most important financial institutions of the state. They must have a stable infrastructure and carry out activities in accordance with strict regulations - so that their customers, citizens, enterprises and budgetary structures have the opportunity to use secure and affordable services. The main objectives of the monetary policy of the state also involve the most active use of this infrastructure. The task of the Central Bank is to ensure effective legal regulation of its building and modernization.
Bank of Russia Monetary Policy: Key Priorities
It will be useful to consider what priorities the Russian Central Bank adheres to in monetary policy. We noted above that the Central Bank as the main credit and financial institution of the state chooses this or that approach in managing economic processes based on the state of affairs in the national economy, real factors affecting the development of the economy. The corresponding principle characterizes the Russian Central Bank.
This lending institution, as practice shows, implements predominantly conservative strategies during periods of recession and liberal ones - with the growth of the state economy. So, in the crisis of 2008-2009, the key rate of the Central Bank of the Russian Federation was significantly increased: it slowed down the lending market, significantly reduced capitalization in the economy, but at the same time, it helped to keep inflation at an acceptable level. After overcoming the crisis, the key rate decreased: the Central Bank switched to a liberal policy of managing economic processes.
Due to the fall in oil prices and the complications of Russia's international relations in the Russian economy, a recession again occurred in 2015. The Central Bank has raised the key rate and continues to keep it at a fairly high level. The inflation rate - if we consider it as the main criterion for the effectiveness of monetary policy, as statistics show, is in the Russian Federation at an acceptable level.
Again, we note that among economists there are different assessments of the approaches of the Central Bank of the Russian Federation to regulating the economy: there is a point of view that the key rate should be reduced and stimulated lending, as a result, increase the level of capitalization of various sectors of the national economy.
Summary
So, we examined the essence, main goals and instruments of the monetary policy of the state, which is also called monetary. Its main subject is the Central Bank. He is responsible for regulating inflation, the balance of payments, the key rate, and regulating the activities of commercial financial institutions, which also play a crucial role in the implementation of the state’s monetary policy. Depending on the economic situation inside the country, beyond its borders, the influence of socio-political factors, the Central Bank can choose one or another monetary strategy, as well as specific tools for its implementation. In the general case, they reflect one of two approaches: conservative - implying a reduction in the capitalization of the economy or its key industries, or liberal - characterized by the desire of the Central Bank to stimulate an active exchange of capital of market participants.
If necessary, one approach can replace another. For example, when factors contribute to the economic recession, the goals of Russia's monetary policy tend to reflect the desire of financial authorities to reduce the volume of capitalization of the economy. This looks like an increase in the Central Bank's key rate, in some cases - a change in the requirements for reserves of commercial credit institutions. But as soon as the economic situation in the state stabilizes, the Central Bank, as a rule, lowers the key rate.