Objectives Of Monetary Policy

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Monetary policy is the art of managing money. It is a widely used tool by the central bank to control the money supply, often targeting the inflation rate and interest rate. The ultimate objective of the monetary policy is to control the price level and to better the overall economic situation of a country. Changes in the interest rates directly influence the behavior of individuals through an increase or decrease in the cost of borrowing. With a stable price level and a steady growth rate, economic and financial planning has been made much easier.
Cecchetti (2000) examined the issues faced by different monetary policy-makers in formulating a monetary policy. The major issue is inflation-biased problems whose prominent solution is to create independent central banks. He said that with less political intervention and better overall macroeconomic condition, the Central banks of different countries have been more independent and accountable. Different other researchers have also emphasized on the independent central banks. As stated by Blinder (1997) that the central bank or monetary authority, which is independent in exercising its power and performing its functions, is generally given clear objectives. It is commonly thought that independent policy makers could better control the inflation and output rate. Also, they are …show more content…

(2014) found two misconceptions about money creation among different researchers. Firstly, they argued that banks don’t just act as intermediaries, but they actually create deposits and hence money. Secondly, they asserted that central bank controls the money supply by setting the price of reserves, which is the interest rate, rather than the quantity of reserves. According to them, the so-called money multiplier model doesn’t hold true because the commercial bank’s lending decision depend entirely on the profitable lending opportunities available to them, which in turn depend on the interest rate prescribed by the central

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