Instruments and types of monetary policy

There are different types of monetary policy. It refers to all state measures that regulate the entire state monetary system, controls the loan capital market and specifics of non-cash settlements. The main objective of this policy is to achieve general economic goals: stabilize prices and economic growth rates and strengthen the monetary unit.

What are the goals?

The implementation of monetary policy is carried out by the state and the Central Bank in order to stabilize the economy - to strengthen the national currency, accelerate the growth rate of the economy, reduce prices for products and so on. Since it is part of the macroeconomic policy, various monetary policy instruments are used to translate it into reality. Among its objectives are:

• Primary, which are aimed at increasing employment among the population, to normalize the price level, to restrain inflationary processes, to accelerate the rates of economic growth, to increase production volumes and to equalize the state's balance of payments.
• Intermediate goals: concern adjustment of current demand for primary consumption goods and decrease (increase) in money supply. These goals are aimed at influencing the pricing policy, attracting investments, and increasing the employment of the population.
• Tactical goals: they are put in the short term and they concern the control of the money supply, the level of the interest rate and the exchange rate as a whole.

There are different types of monetary policy, and each state has the opportunity to choose a specific type of policy, taking into account the state of the economy in the country, the specifics of production development, the degree of employment of the population and so on.

Soft policy

The peculiarity of soft monetary policy is that it stimulates various branches of the economy, regulating interest rates and increasing the amount of money supply. The central bank performs a number of operations:

• State securities are purchased, and operations are conducted on the open market. The received funds are transferred to the reserves of banks and to the accounts of the population itself. The so-called cheap money policy contributes to the growth of the money supply and the improvement of financial capacity of banking organizations.
• The task of the Bank of Russia is to lower the maximum of the bank reserve to the maximum, which will make the lending opportunities for different sectors of the economic sphere much wider.
• The interest rate is falling, which is beneficial for commercial banks - they can take more advantageous loans. On the other hand, this affects the increase in the volume of loans issued to the population, but on more favorable terms. Accordingly, additional funds are being attracted in the form of deposits.

In fact, the policy of cheap money is aimed at expanding the bank loan, thereby reducing interest rates. As a result, the mass of money in circulation increases.

Rigid Monetary Policy

It is aimed at introducing various restrictions, to keep the growth of money, so that inflationary processes can be contained. Within the strict policy of the Central Bank, the following operations are performed:

• The limit of bank reservations increases to reduce the growth of money supply;
• The interest rate is raised, which stops borrowing from the Central Bank and limits the issuance of loans to the population, as a result, the growth of the money supply is suppressed in this way;
• State-owned valuable banks are sold.

The essence of "tough politics"

The policy of expensive money is spent in the event that it is necessary to maintain a stable exchange rate of the ruble, if necessary, to reduce the demand for foreign currency. In turn, this helps to keep inflation within certain limits. The implementation of such a policy can lead to both positive and negative consequences:

• Stimulated savings of the non-financial sector, as there is an increase in interest rates on deposits;
• There is a selection of enterprises in terms of their effectiveness - they will have the opportunity to take an expensive bank loan.

But the policy of expensive money has its drawbacks. So, lending volumes will decrease, in economy there will be a decline. Growth and costs associated with the rise in price of credit servicing, which will provoke inflation costs. The banking system itself will lose in sustainability.

Enabling Policies

There are some types of monetary policy, both stimulating and deterrent. The first is aimed at reducing the discount rate, the standardized reserve requirements, in addition, this policy is associated with the purchase of public assets on the open market. Such actions are taken by the state at a time when the economy is experiencing a general decline. The task of politics is to try to stop the general growth of unemployment in the country, increasing the business activity of the population.

Restraining Policy

This type of policy conducts reverse actions, and its task is to reduce the overall supply of money. As a consequence, the monetary policy of the Central Bank is expressed in the sale of state assets, an increase in the discount rate and a revision of the normalized reserve requirements, which should be increased. Such a policy is carried out at a time when there is a need to contain inflation and reduce business activity.

What tools?

Monetary policy has its goals and tools to achieve them. They have their own classification:

• Depending on the objects of impact, such instruments of monetary policy as credit expansion and credit restriction are singled out. The first tool is aimed at increasing the level of employment of the population and increasing production volumes. Credit restriction is carried out in order to protect the state economy from increased activity and a decrease in inflation.
• Depending on the form of monetary policy involves the use of direct and indirect tools. Direct - these are various directives, instructions and instructions coming from the Central Bank. Indirect instruments presuppose the creation of a central bank of specific conditions in the financial market to achieve the set goals.
• By the characteristics of the parameters, the tools are qualitative and quantitative. The first ones suggest that bank loans are regulated directly by the regulator, and quantitative ones mean the influence of the Central Bank on the possibilities of commercial financial organizations regarding the system of lending and borrowing.

The fundamentals of the Central Bank's policy

Monetary policy of the Central Bank is based on a change in the normalized amount of reserves. In addition, the Central Bank may change the discount rate, that is, to regulate the interest on which the regulator will lend to commercial organizations. By lowering or increasing the interest rate, the Central Bank influences the supply of money. If the refinancing rate is high, commercial companies will take less loans, giving out their loans as rarely. This is the most flexible instrument of the country's financial and credit policy, since the Central Bank itself has a small percentage of loans, which is not higher than the total amount of bank reserves.

Monetary policy of Russia is based on such an instrument as entering the world market and conducting operations related to securities. Moreover, all operations take place on the secondary market, and the main assets are treasury bills and government bonds. Buying securities, the Central Bank raises the reserves of commercial structures. Experts note that the purchase of securities by the Central Bank is an effective tool during the economic downturn.

What methods?

The main directions of monetary policy are as follows:

1. Change in the interest rate for transactions conducted by the Central Bank. The base interest rate is revised on the basis of two forms: lombard rate rates and refinancing rate.
2. Change in reserve requirements for other credit companies, which must deduct funds from borrowed resources in the reserve fund of the Central Bank. Such reserve requirements act as a cash buffer, regulate bids on the money market, control the liquidity of the entire banking system.
3. Transactions that are made on the securities market. The central bank buys or sells bills of exchange, bonds, assets of banks and corporations. The Central Bank buys highly liquid bonds with low credit risk and good marketability.
4. Refinancing of commercial banking organizations, which makes it possible to increase the liquidity of financial and credit institutions.

Pros and cons

We described the main types of monetary policy applied by the Central Bank of Russia. It is noteworthy that monetary policy can be conducted in different scenarios, respectively, and the effect can be very different. Its application has certain advantages.

So, with the stimulating policy, the interest rate is reduced, which affects the growth of investments and a number of other expenses. In addition, the so-called multiplier effect is affecting : on the one hand, the deposit accounts of banks are expanding, and the money supply is increasing, on the other hand, the rate cuts affect the increase in costs. But the application of monetary policy can lead to higher inflation. In general, any type of monetary policy is aimed at improving the state of the country's economy.