Types of Monetary Policy
Earlier in this series, we mentioned the fact that governments and central banks set policies in an effort to encourage certain economic conditions, such as stimulating growth or keeping inflation under control.
Although there tends to be a lot of similarities in terms of the overall goals of various central banks, the specific goals of central banks can change in accordance with the particular economic conditions faced by the countries in question. At the end of the day, monetary policy is all about creating the conditions for growth, while keeping prices relatively stable. In order to achieve these aims, central banks their tools to control things such as:
- Interest rates
- Inflation,
- The supply of money
- Reserve requirements over banks
- Discount window lending to commercial banks
There are three main types of monetary policy: expansionary; restrictive/contractionary; and neutral.
Expansionary Policy
An expansionary monetary policy is one where the central bank either decreases the interest rate or expands/increases the money supply. The end result of both these actions is to reduce the cost of borrowing, with the aim of encouraging spending and investment. When this policy is based purely around lowering interest rates, it is known as an accommodative policy.
Restrictive/Contractionary Policy
A contractionary or restrictive monetary policy is one where the supply of money is reduced, and this can often be accompanied by raising interest rates. A policy of purely raising the interest rates is known as a ‘tight’ monetary policy.
The aim of this is to slow down the rate of economic growth by making borrowing money more expensive and difficult, which will reduce spending and investment by consumers and businesses.
Neutral Policy
A neutral monetary policy is intended neither to fight inflation or create growth and would be implemented when the economy is in good shape and does not require central bank intervention in order to keep it that way.
Other articles in this series:
Forex Trading Fundamental Analysis Masterclass Part 1
Forex Trading Fundamental Analysis Masterclass Part 2
Forex Trading Fundamental Analysis Masterclass Part 3
Forex Trading Fundamental Analysis Masterclass Part 4
Forex Trading Fundamental Analysis Masterclass Part 5
Forex Trading Fundamental Analysis Masterclass Part 6
Forex Trading Fundamental Analysis Masterclass Part 7
Forex Trading Fundamental Analysis Masterclass Part 8
Forex Trading Fundamental Analysis Masterclass Part 9
Forex Trading Fundamental Analysis Masterclass Part 10
Forex Trading Fundamental Analysis Masterclass Part 11
Forex Trading Fundamental Analysis Masterclass Part 12
Forex Trading Fundamental Analysis Masterclass Part 13
Forex Trading Fundamental Analysis Masterclass Part 14
Forex Trading Fundamental Analysis Masterclass Part 15
José Ricaurte Jaén is a professional trader and Guest Editor / community manager for tradersdna and its forum. With a Project Management Certification from FSU – Panama, José develops regularly in-house automated strategies for active traders and “know how” practices to maximize algo-trading opportunities. José’s background experience is in trading and investing, international management, marketing / communications, web, publishing and content working in initiatives with financial companies and non-profit organizations.
He has been working as senior Sales Trader of Guardian Trust FX, where he creates and manages multiple trading strategies for private and institutional investors. He worked also with FXStreet, FXDD Malta, ILQ, Saxo Bank, Markets.com and AVA FX as money manager and introducing broker.
Recently José Ricaurte has been creating, and co-managing a new trading academy in #LATAM.
During 2008 and 2012, he managed web / online marketing global plan of action for broker dealers in Panama. He created unique content and trading ideas for regional newspaper like Capital Financiero (Panamá), La República (Costa Rica), Sala de Inversión América (Latinoamérica) and co-developed financial TV segments with Capital TV.
He is a guest lecturer at Universidad Latina and Universidad Interamericana de Panamá an active speaker in conferences and other educational events and workshops in the region. José Ricaurte worked and collaborated with people such as Dustin Pass, Tom Flora, Orion Trust Services (Belize) and Principia Financial Group.
