Expansionary monetary policy is traditionally used to try to combat
unemployment in a recession by lowering interest rates.
LEARNING OBJECTIVE [ edit ]
Understand the value of discretionary expansionary monetary policy and the associated
shortcomings.
KEY POINTS [ edit ]
The success of monetary policy intervention rests on the credibility of the central bank on one
hand and the understanding of central bank operations related to interest rates and money
supply effects on the part of the public, in general.
Without central bank credibility with respect to low interest rate targets, economic agents may
assume that expansionary policy will lead to inflation and begin augmenting behavior to initiate
the outcome expected, higher inflation.
Announcements can be made credible in various ways. One method would be to establish an
independent central bank with low inflation targets (but no output targets).
TERMS [ edit ]
discretionary
Available at one's discretion; able to be used as one chooses; left to or regulated by one's own
discretion or judgment.
expansionary monetary policy
Traditionally used to try to combat unemployment in arecession by lowering interest rates in the
hope that easycredit will entice businesses into expanding. Give us feedback on this content: FULL TEXT [ edit ]
Expansionary monetary policy is traditionally used to try to combat unemployment in
a recession by lowering interest rates in
the hope that easy credit will entice
businesses into investing, leading to
overall economic growth. Monetary
policy, to a great extent, is the
management of expectations between
interest rates, the price of the use of
money, and the total supply of money.
Monetary policy uses a variety
ofdiscretionary tools to control one or
both of these to influence outcomes like
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economic growth, inflation, exchange rateswith other currencies, and unemployment. When
the central bank is in complete control of the money supply, the monetary authority has the
ability to alter the money supply and influence the interest rate to achieve policy goals .
Money supply
The increase in the money supply is the primary conduit for expansionary monetary policy.
However, the success of monetary policy intervention rests on the credibility of the central
bank on one hand and the understanding of central bank operations related to interest rates
and money supply effects on the part of the public, in general. For example, if the central
bank is implementing expansionary policy but is committed to keeping interest rates low, the
central bank needs to convey this policy with credibility, otherwise economic agents may
assume that expansionary policy will lead to inflation and begin augmenting behavior to
initiate the outcome expected, higher inflation.
Announcements can be made credible in various ways. One is to establish an independent
central bank with low inflation targets (but no output targets). Hence, private agents know
that inflation will be low because it is set by an independent body.