The Impact of Monetary Policy
‘Monetary policy is how central banks manage liquidity to create economic growth. Liquidity is how much there is in the money supply. That includes credit, cash, checks, and money market mutual funds. The most important of these is credit. That includes loans, bonds, and mortgages’ (https://www.thebalance.com/what-is-monetary-policy-objectives-types-and-tools-3305867 ).
For instance, in Russia monetary policy influences economy through the interest rate. Its’ main parameter is the key rate of The Bank of Russia. The Bank of Russia proceeds from economic development forecast and risk assessment for reaching inflation goals at the medium-term time horizon due to the dispensed in time influence of monetary policy on Russia’s economy. It also takes into account possible risks for sustainability of economic growth and for financial stability. The Bank of Russia pursues an active informational policy, clarifying reasons and expected results of decisions in the sphere of monetary policy which understanding of general public has a great value for boosting the effectiveness of The Bank of Russia.
Monetary policy pursues through the stock market with a help of Federal Fund rates. One shift in the stock market calls the chain of events, which concern other short term interest rates, unstable exchange rates, money stock, volume of credit involved in economy and also rates of the employment-to-population, output and prices. For example, if the Federal Reserve decreases the supply of reserves subsequent increasing of Federal Fund rates tend to spread fast to other short term market interest rates. Since interest rates paid on many deposits using money supply being in circulation are being regulating slowly, conducting balance in money becomes less attractive. As customers strive to get the highest available on the market incomes, a mean connected with supply money being in circulation falls away. Furthermore, supply money available to providing can also decrease, because bank reserves and deposits shrink.
Higher expenditures on borrowings and possible limitations on provision of credit will lead to decrease of bank credit growth and the weakening of the effectiveness of wider credit measures.
The change in short-term interest rates will also lead to a change in long-term rates for such financial instruments as domestic mortgages, corporate bonds and treasury bonds, especially if this change in short-term rates is expected to be countered. Thus, the increase in short-term rates, which is expected to continue, will lead to an increase (albeit less than expected) in long-term rates.
Higher long-term interest rates will reduce demand in those areas that are most sensitive to interest costs, such as housing construction, capital investment of commercial enterprises, consumer durables (for example, cars and large home appliances). Higher mortgage interest rates suppress demand for housing. Higher rates of industrial bonds increase the cost of credit for entrepreneurs and, thus, limit the demand for growth in production capacities of factories and equipment.
More stringent conditions for the provision of bank loans may restrain the demand for the means of production from those firms that are more dependent on bank loans. In addition, higher rates for car loans reduce the demand for …
