Essay on Monetary Policy

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Monetary policy is among the many tools used by a national government to manipulate its financial system. Monetary policy refers to the method used by the financial authority of any country to control the supply and availability of money (Woelfel, 1994). It is often targeted at interest rates to achieve lay down objectives directed towards economic growth and stability (Woelfel, 1994). Monetary policy rests on the link between interest rates in an economy, that is, the relationship between interest rates and the total money supply. It employs a variety of methods to control outcomes like inflation, economic growth, currency exchange rates and unemployment.

Monetary policy can either be expansionary policy in which case
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One of these approaches is quantitative easing (QE). Quantitative easing is a technique used by central banks to boost money supply in an economy when interest rates are close to or at zero thus cannot be reduced further (Woelfel, 1994). To increase the supply of money under such conditions, the central bank may be forced to buy government assets/securities like government bonds, mortgage-backed securities or government debt from banks thus increase their surplus revenue hence raise or stabilize prices of such securities and consequently reduce interest rates in the long term.

With this insight in mind, the remaining part of this essay seeks to critically examine the methods of implementing monetary policy when interest rates are close to or at zero.

Monetary Policy Options at the Zero Bound
Interest rates have the lowest bound at zero mark. When this limit is reached, serious problems occur in designing appropriate monetary policy approaches since interest rates can never be set below this mark. Countries like Japan, United States and Switzerland have faced this challenge in the recent past thus calling for alternative approaches to monetary policy when the nominal interest rate is close or at zero.

Conventional monetary policy methods are always channeled towards lowering interest rates to stabilize inflation and other outputs. This is however impossible in situations whereby the interest rates are already close to or zero calling for
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