Crypto Glossary

Monetary Policy

Monetary policy can be defined as a set of rules that a country’s central bank makes to control the supply of money.

What Is Monetary Policy?

It might sound like that monetary policy is handled by economists only, but its effects are realized all around.

Monetary policy is a set of actions that centralized financial institutions of a country or regional organizations, like the European Union, use or follow to control the overall supply of money. These rules are followed to keep inflation and rising prices in the economy in check and allow for an environment that maximizes employment. 

Monetary policy has both domestic and global impacts, which is the reason that powerful countries keep on revising them. The ultimate goal is to keep the economy running smoothly and the inflation rate within control. Central banks, according to the monetary policy, may increase the interest rate on borrowing to discourage spending.  

What Are the Objectives of Monetary Policy? 

Monetary policy is used by financial authorities to increase the rate of employment, stabilize the prices of products, and set the long-term interest rates. Consequently, it encourages economic growth and stability by increasing consumer activities. Such policies also contribute to the increase in the level of exports and decrease imports in a country, which increases the valuation of the country’s currency. 

Key Tools to Implement Monetary Policy

Central banks use a number of tools to implement monetary policy.

  • Central banks create new bank reserves to sell and buy short-term bonds in an open market. They buy assets to increase the money supply and decrease it by selling them. 

  • Another tool central banks use is the interest rate. Nation’s banks deal with loans depending on the interest rate set by the central bank.

  • Public announcements about future policies also move the market, which makes it a powerful tool.

How Often Does Monetary Policy Change?

Changes in a monetary policy can be made when they seem inevitable. Typically, countries with stable economies make changes to their monetary policy after a set duration. 

Every country has its own rules regarding the time to make changes to monetary policy. 

Impact of Cryptocurrency on Monetary Policy

Central banks have a monopoly on issuing money as they’re allowed by the nation’s law to govern according to the monetary policy. 

Cryptocurrency, by its nature, is not issued by a central bank. If the use of cryptocurrencies increases to a great extent, central banks can lose their monopoly. In fact, the first cryptocurrency (Bitcoin) came was developed as a response to the 2008 financial crisis caused by the policies of central banks.

It can’t be said with utmost certainty that cryptocurrency will soon dent the centralized banking system or affect monetary policy — only time will tell.

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