what are the strengths and weaknesses of monetary policy?
monetary policy Watch
- Thread Starter
- 09-03-2016 12:15
- 09-03-2016 15:38
The first question you should be asking yourself is what is monetary policy? Monetary policy is the process by which the monetary authority of a country controls the supply of money, which often targets an inflation rate or interest rate to ensure there is price stability and general trust in the currency.
- Evidence shows that, in normal conditions, interest rates have a direct and powerful effect on the household spending, suggesting that UK consumers are highly interest rate elastic
- The Bank of England’s Monetary Policy Committee is independent from government and can make decisions free from political interference
- Interest rates can be adjusted on a monthly basis, this contrasts with discretionary fiscal policy which cannot be adjusted at such regular intervals
- While the full effects of interest changes may not be experienced for up to a year
Last edited by undercxver; 09-03-2016 at 15:40.
- There are still time lags to see the full effects, and there are some negative effects
- Raising interest rates can negatively affect on investment spending and the housing market, exchange rate and hence the balance of payments
- The money supply is tough to control in practice, therefore controlling interest rates is preferred
- Interest rates may fall to very low levels during a deep recession, and during this the demand for credit may rise, the supply may become trapped in the system (liquidity trap)