Chapter 21, Part III. A Bit More on Monetary Policy.

Part III. A Bit More on Monetary Policy.

Commander in Pips: So, we’ve covered that a government with and via its Central Bank forms its own monetary policy. Monetary policy is necessary for achieving some goals and some of them could depend on other Central Banks of different countries. This happens because the current world economy tightly integrated and globalized. The simple example is cooperative work of the US Federal Reserve and the Peoples Bank of China, since the US is the largest consumer of Chinese goods, while China is greatest holder of US debt. So, there are multiple questions that the Central Banks of these countries should decide together, since their economics strongly depend on each other.

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Generally speaking, the major aim of any monetary policy of any Central Bank is to find equilibrium between inflation and economic growth. That is the same as maintaining price stability and economic growth pace stability, and to achieve these points, a Central Bank will apply its own monetary policy that could adjust in desirable way some factors:

- interest rates, or as we’ve said – borrowing price;

- inflation;

- overall money in turnover (also referred to as money supply);

- Healthy of overall domestic banking system, that Central bank controls via stress-tests and reserve requirements;

- Interest rates level on interbank market – lending/borrowing money to/from commercial banks.