Definition

The regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation and stabilize currency. Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses.

monetary policy influences inflation and the economy-wide demand for goods and services--and, therefore, the demand for the employees

conomic strategy chosen by a government in deciding expansion or contraction in the country's money-supply. Applied usually through the central bank, a monetary policy employs three major tools: (1) buying or selling national debt, (2) changing credit restrictions, and (3) changing the interest rates by changing reserve requirements. Monetary policy plays the dominant role in control of the aggregate-demand.

Monetary policy is what central banks use to manage the amount of liquidity in the economy. Liquidity is the total amount of money, including cash, credit and money market mutual funds. The important part of liquidity is credit, which includes loans, bonds, mortgages, and other agreements to repay.

Objective:
1.To accelerate & maintain growth rate 2.To generate new employment opportunities 3.To maintain internal and external price stability
improving the transparency of the price mechanism. Under price stability people can recognise changes in relative prices (i.e. prices between different goods), without being confused by changes in the overall price level. This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently; reducing inflation risk premia in interest rates (i.e. compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest;

Techniques
Various techniques of monetary policy, thus, include bank rate, open market operations, variable cash reserve requirements, selective credit controls.

Definition: According to A J. Shapiro, "Monetary Policy is the exercise of the central bank's control over the money supply as an instrument for achieving the objectives of economic policy. OR D.C. Rowan, "The monetary policy is defined as discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest and (c) the availability of money."

Monetary policy implementation

consists of three key elements. The first is the selection of a policy signal to formally express the stance of policy. This is often an overnight interbank interest rate but can also be a rate at which the central bank commits to transacting with the market (such as the minimum bid rate at the ECB and the Bank of Englands official Bank Rate). The second element is the choice of an operational target that can be used as a gauge to ensure that the intended monetary policy stance is being attained, a short-term money market rate being the typical choice. In most cases the policy signal and the operational target are the same, such as the Fed Funds Rate in the United States, but they can also differ. For example, under the Bank of Englands framework, the policy rate is the official Bank Rate which represents the overnight rate at which reserves are remunerated as well as the rate at which regular short-term repos are conducted, but the implicit operational target is to achieve a fairly flat money market yield curve close to the policy rate out to the next policy meeting. 4 The third component is the design and utilization of various instruments to achieve the operational target. Key instruments include open market operations, standing facilities, reserve requirements, and the rate of remuneration on reserves. Much of the conventional academic literature has placed a heavy, if not exclusive, emphasis on open market operations as the means through which interest rates are influenced. As a result, changes in the stance of monetary policy have been invariably associated with changes in some quantity aggregate. While policy signals, as defined above, can obviously be changed without any corresponding market operation (eg. the Federal Reserve simply announces the target Fed Funds rate), the relevant question is how desired variations in the operational target can be affected without any corresponding adjustment to quantities. This section addresses this question and in so doing, highlights some of the common misconceptions regarding the control of short-term interest rates.

Tools::::::::::::::::::

1. Open Market Operations: The Fed constantly buys and sells U.S. government securities in the financial markets, which in turn influences the level of reserves in the banking system. 2. The Discount Rate: This is the interest rate that banks pay on short-term loans from a Federal Reserve Bank.

3. Reserve Requirements: This is the amount of physical funds that depository institutions are required to hold in reserve against deposits in bank accounts. It determines how much money banks can create through loans and investment.