TYPES OF MONETARY POLICY | MARTINS LIBRARY

In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations) these open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold) the multiplies effect of fractional reserve banking amplifies the effects of these actions. Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and exchange rate.

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals. However, monetary policy can be expansionary or contractionary. According to Jhingan (2003:619) an expansionary monetary policy is used to overcome a recession or a depression or a deflationary gap.

Contractually, monetary policy is a monetary policy that seeks to reduce the size of the supply of money while expansionary monetary policy is a policy that seeks to increase the size of the money supply.

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