The volume of money turnover per minute is almost impossible to calculate within a particular city, what can we say about the scale of the state or the world? The flow of finances unrestrainedly cuts through from mint houses to mattresses of thrifty citizens. How does the state maintain the necessary balance of funds in the country and what tools does it use? Classical monetary policy will be discussed in this article, and we will consider all its main aspects.
A little about macroeconomics
To understand the mechanism of monetary policy, it is worth briefly mentioning macroeconomics itself - this is a scientific branch of the economy that studies in detail the behavior of the market, supply and demand, as well as other economic phenomena in a particular time period.
Firstly, without its fundamentals it is impossible to plan and predict the behavior of markets for a certain period.
Secondly, macroeconomics incorporates the mainconcepts in the field of state management and economy, and also shows the interaction between them, the population and the reaction to changes in the external, in relation to the state, environment. It is important to remember that macroeconomics is a market within a country, and not the practice of different states. Of course, all examples of this article will be based on examples of the monetary policy of the Russian Federation.
Government regulation
In order to maintain a balance in the country's economy, the government uses certain regulatory measures. Such an impact is rapidly and immediately on several factors:
- Resources, finance and production are regulated. On a national scale, of course.
- Delegation of work from federal to regional hierarchy.
The main factors in the work of the state are:
- Unacceptable domination of the public sector over the private sector. Otherwise, the private business sector will collapse.
- Stimulation of industries that are just ignored by "private traders".
- Unity of state credit, tax and financial policies to stimulate the development and growth of the economy.
- Control over crisis situations. Prevention and mitigation by choosing the right tools.
There are both direct methods of maintaining economic stability and indirect ones. Straight lines give a momentary result due to their specificity. These are prohibitions, and permissions, and restrictions, all kinds of regulations. Indirectsuggest mild stimulation, where the result manifests itself after a certain time. These methods include the financial and monetary system. They stimulate the adoption of certain market decisions in one way or another. One of the methods of such regulation is monetary policy, which we will discuss in more detail below.
Fiscal policy
The main addition to the topic of this article is the fiscal policy of the state. It goes hand in hand with the monetary policy of the state, their interaction is reflected in the current economic situation in our country. Some students confuse these concepts, so let's make it clear once and for all that fiscal policy is a state policy aimed at reducing negative fluctuations in the economy, as well as building supports for the flow of a stable economic system in the short term.
The instruments here, in contrast to monetary policy in the economy, are money in the form of state revenues and expenditures. These are taxes, transfers and spending on government purchases. This lever has several functions:
- Stabilization between the value of aggregate demand and the country's GDP.
- Macroeconomic balance, where all the resources of the state are effectively used.
- As a result, price stability.
Fiscal and monetary policy have a restraining and stimulating property. But they use different tools. We present them for comparison purposes.
Restraining property -use is supposed at the moment of "heating" of the economy, then there are measures to increase taxes and reduce government spending. Often, contractionary policies are used to reduce inflation.
Stimulating property is the opposite of the previous one. In this case, the state actively makes public purchases, reduces taxes, and increases transfers, if possible. In most cases, this leads to an increase in the production volumes in the country.
Monetary policy
We will reveal the essence of this state instrument in more detail. Monetary policy is more flexible than fiscal policy, as it directly affects the money circulation in the country. However, it is also the most fragile, because incorrect forecasts and actions can lead to inflation or deflation, which happens less often.
A bank's monetary policy (aka monetary policy) is a policy that affects the amount of money in the market to ensure price stability, employment and growth in production. Its author is the Central Bank and is responsible for its implementation. Monetary policy is an integral part of the whole unity of the state economic policy. There are two types:
- Tough. Supports a certain amount of money supply in the economy.
- Flexible. Regulates the refinancing interest rate, from which other economic blocs and private banks are repelled.
As in the case of fiscal, monetary policythe state has a number of instruments of deterrence and stimulus. The deterrent focuses on the fight against inflation in the form of a decrease in business activity, in particular, it is used during an economic "boom". Interest rates are rising. Stimulus is activated when economic turnover is declining and the country needs "stimulus therapy" in the form of growth in business activity against unemployment, an increase in the money supply, interest rates fall.
How did it come about?
The monetary policy of the Central Bank originated in the first half of the nineteenth century in the historical homeland of macroeconomics, in the United States. Then John Taylor in his writings used the term of the country's monetary policy to equalize the economy of the United States and Great Britain.
In Russia of the pre-revolutionary era, the expression "monetary policy" was encountered as early as the 1880s on the pages of scientific publications and articles devoted to the issue of paper money. Already in the first courses of economic and state areas in universities, the work of this science is described in detail. Economists of that time began to actively talk about this phenomenon, and already 20 years later the concept of "monetary policy of the government" is used by the authorities.
Monetary policy is characterized as a way of "easy transformation" of cash flow through flexibility and efficiency, as well as its use together with the fiscal policy of the state. This result is obtained because the tool gently, rather than aggressively, induces banks to pursue a particular policy. ATincluding the influence of the Central Bank on commercial ones, the ability to regulate their activities. This helps to mitigate the effects of crises, contain rising prices, and build further economic growth.
It would be useful to mention here the term commercial bank refinancing.
Refinancing of commercial banks implies the issuance of funds by the Central Bank to other credit institutions. Of course, the issuance of funds is carried out "at interest" or subject to a number of conditions. Also, the Central Bank is engaged in the rediscount of securities in the portfolios of commercial banks. Most often these are bills. It used to be the most basic monetary policy method of the Central Bank.
Purposes and Features
The goals of monetary policy are divided into strategic (generalized, more integrated within one country) and tactical (with a vector of a specific direction).
Strategic: economic growth of the state, stabilization of prices in all sectors, a stable tax system that can be mastered by the working population of the country.
Tactical: includes money supply, loan interest, as well as the exchange rate of the national currency.
The features of the monetary policy of the Central Bank are its tools, namely:
- Refinancing of commercial banks.
- Buying and selling securities and foreign currencies on the open market.
- Change in required reserves ratio.
What are the benefits?
Variousexperts, due to the subjectivity of opinions, distinguish, respectively, different advantages, but the most basic ones can be distinguished among them.
No internal lags
This is the period of time between the realization of the economic situation that has arisen in the state, and the moment of making decisions to improve it. Since the decision on the purchase and sale of government securities is made by the Central Bank instantly, there are no problems with their resale to the population and other banks. Of course, it is worth considering that similar securities in other developed countries have high reliability and minimal risks when manipulating monetary policy instruments.
No wipe effect
An stimulating monetary policy (compared to the same fiscal policy) is due to a decrease in the interest rate, which leads not to crowding out investments, but to stimulating them.
Cartoon
The multiplier effect of influence on the economy always accompanies both fiscal and monetary policy. The first multiplier is the banking multiplier. Expands deposits, increases the money supply. And the second is the growth of autonomous spending, where, after a rate cut, the value of total output increases.
And the disadvantages?
Inflation is the main disadvantage. Moreover, they are available both in the short term and in the long term, as the money supply grows. Adherents of the Keynesian school believe that it is advisable to use such a policy only at the time of an inflationary gap in the economy. If there is a recession, then it is more effective"connect" stimulating fiscal policy.
The next shortcoming of monetary policy is a significant external lag. It is characterized by the period from the moment the measures are taken until the first positive results appear in the economy. For example, if you make a sale of government securities at the moment of "overheating", then the result may return already at the moment of recession, then this situation will only get worse.
Dissonance between "dear money" and "cheap money" policies. For example, the policy of "cheap money" may give commercial credit organizations additional reserves, however, there will be no guarantees that an increase in the volume of credit for the population will follow. Individuals and legal entities may be afraid to take out loans due to negative views on the future. Concerns about the future of the economy will be in the air. Such sentiments will further aggravate the situation, despite the stimulus tools.
Double standards of interest rate and money supply. The central bank can regulate either the rate or the money supply in the country, since both indicators determine the equilibrium of the money market. Therefore, if the Central Bank uses the main method of monetary policy to support the stability of the money supply, then control over the rate will be lost, and as a result, it will decrease, regardless of the desire of the Central Bank.
In Russian practice
The economy of our country from the beginning of the 21st century until the first major crisis in 2008 had a certain model of economic development. It represented a greater focus on increasing aggregate demand by increasing exports. The central bank in this situation weakened the ruble, with confidence in a stable dollar exchange rate, in order to buy foreign assets in foreign currency, increasing its gold and foreign exchange reserves, and maintain a high exchange rate of foreign funds to stimulate exporters. However, as a consequence, there was an increase in the money supply when the bank exchanged foreign assets for rubles.
Now the monetary policy of the Russian government is based primarily on the political situation in the foreign arena. Despite the fact that this factor is macroeconomic, environmental factors are strongly involved in the situation. The sanctions have strengthened the “sinking” points within the state economy and contributed to the development of innovative programs that help to save many resources and use them with even greater benefit. The main objectives of monetary policy are determined in connection with the level of development at which the state is located. During the period from September 2013 to August 2015, the key rate of the Central Bank almost doubled. This indicates the complication of the economic situation as a whole. Now the priority task of the Bank of Russia is to coordinate the parameters of specific monetary policy operations and the operation of payment systems, as well as markets. In the future, monetary policy is considering the transition to a single auction system in refinancing operations, using all kinds of assets. Nevertheless, how the economy will manifest itself in the future depends not onlyfrom the Central Bank, but also from the instruments that they and the state will choose at one time or another, since it is obvious how fragile and mobile the system is.
Short thesis
Having opened the topic, one can understand that its scale cannot be fit into a few pages, so experts compile entire manuals and books, scrupulously studying every mechanism of such a complex tool as monetary policy. Its complexity lies in the flexible consequences that can manifest themselves after the necessary period, aggravating the situation.
In fact, monetary policy appeared much earlier than this concept was revealed, since the spheres of macroeconomics in the form of science were not immediately presented. However, the principle of the work of the money supply in the state was observed even in Ancient Rome and other first civilizations, since the main principle here is logic - if you do not count the funds and distribute them in accordance with the needs of the state, then you can quickly empty the treasury, and the country will plunge into chaos.
Credit monetary policy is applicable to any state, so all countries of the world apply to it using various mechanisms. The problem of such activity is reflected in the choice of mechanism. Therefore, one should take into account the factors of time, the interaction of all sectors (improvement in some does not always extend to others), and also remember that monetary policy works more efficiently in a team with fiscal. A competent combination of all instruments will allow the state not only to stabilize the economy, butand develop it in the future, smoothing out the negative "corners" in the form of crises as gently as possible.
