Monetary Policy

Monetary Policy

Definition

Monetary Policy: Refers to the credit control measures adopted by the central bank of a country to control the supply of money as instrument for achieving the objectives of general economic policy. It is also seen as any conscious effort or action undertaken by the monetary authorities to change the quantity, availability or cost of money.

Objectives of Monetary Policy

The objectives of monetary policy are:

1. To create employment
2. Price stability
3. Economic growth and development
4. Balance of payment
5. Increased savings and credit flow to the priority sectors of the economy

Monetary policy is a major economic stabilization weapon which involves measures designed to regulate and control the volume cost availability and direction of money and credit in an economy to achieve some specified macro-economic policy objectives. That is, it is a deliberate effort by the monetary authorities (the Central Bank) to control the supply and credit conditions for the purpose of achieving certain broad economic objective (Wrightsman, 1976). Monetary policy is administered by the Central Bank in some cases with some degree of political / government interference.

OBJECTIVE OF MONETARY POLICY: According to Ogwuma (2000) some objectives of monetary policy are promoting price stability, reducing pressures on the external sector, stabilizing the naira, exchange rate, and stimulating economic growth. This is not exhaustive of the objective of monetary(ies) policy some others are to moderate inflation rate, inducing increased financial saving, inducing investment and promoting employments.

Expansionary Monetary Policy: This policy is said to be expansionary if it is desired to increase the quantity of money in circulation so that the level of money supply in the economy will increase. It is called expansionary because it has the potential of increasing aggregate credit and lending, which will eventually increase the quantity of money in circulation.

Concretionary Monetary: This policy is said to be concretionary or right if the objective is to reduce the quantity of money in circulation and therefore the level of money supply.

Fiscal Policy: Fiscal policy as already said in earlier review is the use of government tax, spending or expenditure including customs and excise duties, and subsidies to influence the level of economic activity and this is implemented through change in the direct in which the government want to channel its economic activity in relation to the proceeding year. For instance in a time of deflation, the government can have budget deficits as to leave more fund in the hands of consumers. As seen in figure one (1) below where companies income tax was reduced in 1996 to 30%.