There are various types of monetary policy. It means all government measures that govern the entire state monetary system, keeps under control the market for loan capital and features of cashless payments. The main objective of such a policy is to achieve general economic goals: to stabilize prices and the rate of economic growth and strengthen the monetary unit.
What are the goals?
The conduct of monetary policy is carried out by the state and the Central Bank in order to stabilize the economy - to strengthen the national currency, accelerate economic growth, reduce food prices and so on. Since it is included in macroeconomic policy, various instruments of monetary policy are used to translate it into reality. Among the goals of its implementation are:
- The primary ones are aimed at increasing employment among the population, normalizing the level of prices, restraining inflationary processes, accelerating the pace of economic growth, increasing production volumes and leveling the state balance of payments.
- Intermediate goals: relate to adjusting current demand for primary goods and reducing (increasing) the supply of money. These goals are aimed at influencing pricing policy, attracting investments, increasing employment.
- Tactical goals: are set for the short term and they relate to control of money supply, interest rate and the exchange rate as a whole.
There are various types of monetary policy, and each state has the opportunity to choose a specific type of policy, taking into account the state of the economy in the country, the characteristics of the development of production, the degree of employment of the population, and so on.
Soft policy
The peculiarity of soft monetary policy is that it stimulates various sectors of the economy by adjusting interest rates and increasing the money supply. At the same time, the Central Bank carries out a number of operations:
- Government securities are acquired, and operations are conducted on the open market. The funds received are transferred to the reserves of banks and to the accounts of the population itself. The so-called cheap money policy helps to increase the money supply and improve the financial capabilities of banking organizations.
- The task of the Bank of Russia is to reduce the maximum rate of bank reserves to the maximum, which will make lending opportunities for various sectors of the economic sphere much wider.
- The interest rate is reduced, which is beneficial for commercial banks - they can take loans that are more beneficial for themselves. On the other hand, this affects the increase in the volume of loans issued to the population, but on more favorable terms. Accordingly, additional funds in the form of deposits begin to be attracted.
In fact, the policy of cheap money is aimed at expanding bank credit, reducing interest rates for this purpose. As a result, the mass of money in circulation increases.
Tight monetary policy
It is aimed at introducing various restrictions, keeping the growth of money in order to be able to restrain inflation processes. As part of a tough policy, the Central Bank performs the following operations:
- the limit of bank reserves increases to reduce the growth of the money supply;
- the interest rate rises, which stops borrowing from the Central Bank and limits the issuance of loans to the population, as a result, the growth of money supply is suppressed in this way;
- state-owned valuable banks are sold.
The essence of "tough politics"
A policy of expensive money is carried out when it is necessary to maintain a stable ruble exchange rate, if necessary, to reduce the demand for foreign currency. In turn, this helps to keep inflation within certain limits. The implementation of such a policy can lead to both positive and negative consequences:
- the savings of the non-financial sector are stimulated, as there is an increase in interest rates on deposits;
- there is a selection of enterprises according to the degree of their effectiveness - it will be they who will have the opportunity to take an expensive bank loan.
But the policy of expensive money has its drawbacks. So, lending volumes will decline, the economy will experience a decline. The costs associated with the higher cost of servicing loans will also increase, which will provoke cost inflation. The banking system itself will lose stability.
Incentive policy
There are also such types of monetary policy as stimulating and restraining. The first is aimed at reducing the discount rate, the normalized amount of reserve requirements, in addition, such a policy is associated with the purchase of state assets in the open market. Such actions are taken by the state at a time when the economy is in general decline. The objective of the policy is to try to stop the general growth of unemployment in the country, increasing the business activity of the population.
Restraint policy
This type of policy conducts reverse actions, and its task is to reduce the general money supply. As a result, the monetary policy of the Central Bank is expressed in the sale of state assets, an increase in the discount rate and a revision of the normalized reserve requirements, which should be increased. Such a policy is carried out at a time when there is a need to contain inflation and reduce business activity.
What tools?
Monetary policy has its own goals and tools to achieve them. They have their own classification:
- Monetary policy instruments such as credit expansion and credit restriction are allocated depending on the objects of influence. The first tool aims to increase the degree of employment and increase production. Credit restriction is carried out in order to protect the state economy from increased activity and reduce inflation.
- Depending on the form of monetary policy involves the use of direct and indirect instruments. Direct - these are various directives, instructions and instructions issued by the Central Bank. Indirect tools involve the creation of the Central Bank specific conditions in the financial market to achieve its goals.
- According to the characteristics of the parameters, the tools are qualitative and quantitative. The first ones suggest that bank loans are regulated directly by the regulator, while quantitative ones imply the influence of the Central Bank on the possibilities of commercial financial organizations regarding the system of lending and borrowing.
Fundamentals of Central Bank Policy
The monetary policy of the Central Bank is based on a change in the normalized amount of reserves. In addition, the Central Bank can change the discount rate, that is, regulate the percentage on the basis of which the regulator will issue loans to commercial organizations. By lowering or raising the interest rate, the Central Bank affects the supply of money. If the refinancing rate is high, commercial companies will take loans less, issuing their loans as rarely. This is the most flexible instrument of the financial and credit policy of the country, since the Central Bank itself has a small percentage of loans, which is not higher than the total amount of bank reserves.
Monetary policy of Russia is based on such an instrument as entering the world market and conducting operations related to securities. Moreover, all operations take place in the secondary market, and the main assets are treasury bills and government bonds. When buying securities, the Central Bank increases the reserves of commercial structures. Experts say that the purchase of securities by the Central Bank is an effective tool during a recession.
What methods?
The main directions of monetary policy are as follows:
- Change in interest rate relative to operations conducted by the Central Bank. The basic interest rate is revised on the basis of two forms: the rates on pawnshop operations and the refinancing rate.
- Change in reserve requirements for other credit companies, which must transfer funds from attracted resources to the reserve fund of the Central Bank. Such reserve requirements act as a cash buffer, regulate money market offers, and control the liquidity of the entire banking system.
- Transactions that are performed on the securities market. The central bank buys or sells bills, bonds, assets of banks and corporations. The Central Bank buys highly liquid bonds with low credit risk and good marketability.
- Refinancing of commercial banking organizations, which makes it possible to increase the liquidity of financial institutions.
Pros and cons
We described the main types of monetary policy used by the Central Bank of Russia. It is noteworthy that monetary policy can be conducted according to different scenarios, respectively, and the effect can be very different. Its use has certain advantages.
Thus, with a stimulating policy, the interest rate decreases, which affects the growth of investments and a number of other expenses. In addition, the so-called multiplier effect affects : on the one hand, deposit accounts of banks are expanding, and the money supply is increasing, on the other hand, a decrease in the rate affects the increase in expenses. But applying monetary policy can lead to higher inflation. In general, any type of monetary policy is aimed at improving the state of the country's economy.