• Try to limit to two pages (Spacing at 1.5 lines, Use Time New Roman 12pt font size).

    Identify the main idea or theme of the paper.
  • In your summary make sure to discuss why Bank of Canada focuses on the control of inflation rather than other macroeconomic variables
  • Also discuss how the actions of banks influence the rate of inflation
  • Also make sure to discuss how monetary policy can deliver genuine and significant benefit to society.

table of contents

The Significance of Monetary Policy

1. Introduction to Monetary Policy

1.1. Definition and Objectives

1.2. Key Players in Implementing Monetary Policy

2. Historical Development of Monetary Policy

2.1. Early Monetary Systems

2.2. Evolution of Central Banking

3. Tools and Instruments of Monetary Policy

3.1. Interest Rates

3.2. Open Market Operations

4. The Relationship Between Monetary Policy and Macroeconomic Variables

4.1. Inflation

4.2. Unemployment

5. Monetary Policy in Times of Crisis

5.1. Global Financial Crisis of 2008

5.2. COVID-19 Pandemic

6. Challenges and Criticisms of Monetary Policy

6.1. Effectiveness in Achieving Objectives

6.2. Distributional Impacts

7. The Future of Monetary Policy

7.1. Digital Currencies

7.2. Climate Change Considerations

The Significance of Monetary Policy

1. Introduction to Monetary Policy

In order to accomplish the objectives of maintaining full employment, ensuring price stability, and minimizing fluctuations in income and employment, monetary policy governs the stock of money or of liquid assets. Thus, it views money narrowly and operates through such instruments as open-market operations, the discount rate, and reserve requirements on transactions and time deposits. The consequence of an effectively operating monetary policy is that of ensuring the long-run stability of aggregate supply and aggregate demand or economic security. It guards against fluctuations in income and employment through the use of such instruments as open-market operations, the reserve ratio, and the discount rate. It endeavors to influence the behavior of the public and commercial banking system such that the rate of growth of money supply is consistent with the long-run behavior of the macroeconomic objectives. It prevents the long and variable lag or time inconsistency problem. Monetary policy is neither completely independent of fiscal policy nor irrelevant in correcting inflation or business cycles.

Monetary policy is a policy which intends to influence the level of income, employment, and prices in an economy. It is implemented by a country’s central bank. Monetary policy is concerned with those macroeconomic magnitudes which are influenced in the short run by changes in the monetary base. Since money is capable of influencing these magnitudes in the short run, it protects the free market system against large fluctuations in income and employment about their long-run expected level, or what the Keynesians identify as ‘full-employment’ income and employment level. The present study seeks to explore the problem of economic security in a Monetarist Keynesian context and to provide arguments for a lower rate of growth of money supply.

1.1. Definition and Objectives

The varying definitions of monetary policy reflect the different objectives of controlling the quantity of business money and the outstanding balances of money substitutes issued by the central governments. The outstanding balances of the public debts of central governments are money substitutes only if they can be forced to accept at par for other business money, usually at banks during the transitional period. Both are concerns that members can hold voluntarily because of their peculiar qualities or because they offer protection against various types of measures.

The term “monetary policy” is often defined as the extent to which the circulation of money and bank-like substitutes is regulated in order to ensure the correct quantity of such business during effective demand for the product it supports. This regulation could be carried out through changes in the size or composition of the supply of money, or its price, or both, provided that the authority promoting economic policy is able to influence the commercial bank creation and the demand for money. Non-bank debts can only exert the most immediate and obvious influence on money circulation if money balances can be earned indirectly and freely or quickly converted at par into regular-issue money balances.

1.2. Key Players in Implementing Monetary Policy

Monetary policy is implemented by the central bank. The central bank is the single most important institution in the management of monetary policy. It has been endowed with the authority and the instruments to exercise the powers bestowed upon it by the laws of the country. The objectives and intentions of monetary policy are then implemented by the central bank through injections and withdrawals of cash from the system. Over the years, central banks have been given the responsibility of conducting monetary policy. They were set up as separate entities and given powers to decide the absolute quantity of notes to be issued and the reserve requirements that commercial banks will have to maintain at all times. To achieve this, central banks were given partial or exclusive monopoly of note issue and the clearing services for checks. On the liabilities side, a central bank has obligations to meet the redemption of its obligations to the general public. As a consequence, the central bank keeps a reserve with the commercial banks just in case there are liquidity problems and the commercial banks need extra cash.