A monetary policy is a process undertaken by the government, central bank or currency board to control the availability and supply of money, as well as the amount of bank reserves and loan interest rates. Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. In the US, the Federal Reserve System is the agency executing monetary policy, which can either be contractionary or expansionary, with the former aiming to slow down the supply and even limit it to prevent the devaluation of assets and slow down inflation and the latter increasing the supply of money by lowering loan interest rates to encourage businesses to expand and cut down unemployment rates during recession. Basically, the agency decides how much interest rates would be imposed on banks in terms of borrowing, where banks would also be the ones to determine how high these rates will they be asking from the borrowers.
During elections, the controversial issue of monetary policy is ironically avoided by hopeful candidates, who would talk about other matters except for this subject. Why, it would seem that this topic has its own set of complicated and vague perks and setbacks, with the importance for people to understand what it really is and what its implications in our daily lives. To have a well-informed opinion on this subject, let us take a look at its advantages and disadvantages.
List of Advantages of Monetary Policy
1. It can bring out the possibility of more investments coming in and consumers spending more.
In an expansionary monetary policy, where banks are lowering interest rates on loans and mortgages, more business owners would be encouraged to expand their ventures, as they would have more available funds to borrow with affordable interest rates. Plus, prices of commodities would also be lowered, so consumers will have more reasons to purchase more goods. As a result, businesses would gain more profit while consumers can afford basic commodities, services and even property.
2. It allows for the imposition of quantitative easing by the Central Bank.
The Federal Reserve can make use of a monetary policy to create or print more money, allowing them to purchase government bonds from banks and resulting to increased monetary base and cash reserves in banks. This also means lower interest rates and, eventually, more money for financial institutions to lend its borrowers.
3. It can lead to lower rates of mortgage payments.
As monetary policy would lower interest rates, it would also mean lower payments home owners would be required for the mortgage of their houses, leaving homeowners more money to spend on other important things. It would also mean that consumers will be able to settle their monthly payments regularly—a win-win situation for creditors, merchandisers and property investors as well!
4. It can promote low inflation rates.
One of the biggest perks of monetary policy is that it can help promote stable prices, which are very helpful in ensuring inflation rates will stay low throughout the country and even the world. As inflation essentially makes an impact on the way we spend money and how much money is worth, a low inflation rate would allow us to make the best financial decisions in life without worrying about prices to drastically rise unexpectedly.
5. It promotes transparency and predictability.
A monetary policy would oblige policymakers to make announcements that are believable to consumers and business owners in terms of the type of policy to be expected in the future.
6. It promotes political freedom.
Since the central bank can operate separately from the government, this will allow them to make the best decisions based upon how the economy is performing doing at a certain point in time. Also, the banks would operate based on hard facts and data, rather than the wants and needs of certain individuals. Even the Federal Reserve can operate without being exposed to political influences.
List of Disadvantages of Monetary Policy
1. It does not guarantee economy recovery.
Economists who criticize the Federal Reserve on imposing monetary policy argue that, during recessions, not all consumers would have the confidence to spend and take advantage of low interest rates, making it a disadvantage.
2. It is not that useful during global recessions.
Proponents of expansionary monetary policy state that even if banks lower interest rates for consumers to spend more money during a global recession, the export sector would suffer. If this is the case, export losses would be more than what commercial organizations could earn from their sales.
3. Its ability to cut interest rates is not a guarantee.
Though a monetary policy is said to allow banks to enjoy lower interest rates from the Central Bank when they borrow money, some of them might have the funds, which means that there would be insufficient funds that people can borrow from them.
4. It can take time to be implemented.
With things expected to be done immediately in these modern times, implementing a monetary can certainly take time, unlike other types of policies, such as a fiscal policy, that can help push more money into the economy faster. According to experts, changes that are made for a monetary policy might take years before they begin to take place and make changes felt, especially when it comes to inflation.
5. It could discourage businesses to expand.
With this policy, interest rates can still increase, making businesses not willing to expand their operations, resulting to less production and eventually higher prices. While consumers would not be able to afford goods and services, it would take a long time for businesses to recover and even cause them to close up shop. Workers would then lose their jobs.
Monetary policy is used in to help keep economic growth and stability, but there is no guarantee that it would always help society, considering that it also has its own set if drawbacks. Based on the ones listed above, what do you think?
Natalie Regoli is a seasoned writer, who is also our editor-in-chief. If you have any questions about the content of this blog post, then please send our editor-in-chief a message here.