What is the meaning and objectives of Monetary Policy?



Monetary policy is concerned with the changes in the supply of money and credit. It refers to the policy measures undertaken by the government or the central bank to influence the availability, cost and use of money and credit with the help of monetary techniques to achieve specific objectives. Monetary policy aims at influencing the economic activity in the economy mainly through two major variables, i.e., (a) money or credit supply, and (b) the rate of interest.

The techniques; of monetary policy are the same as the techniques of credit control at the disposal of the central bank. Various techniques of monetary policy, thus, include bank rate, open market operations, variable cash reserve requirements, selective credit controls.

R.P. Kent defines monetary policy as "the management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment."

According to A J. Shapiro, "Monetary Policy is the exercise of the central bank's control over the money supply as an instrument for achieving the objectives of economic policy."

In the words of D.C. Rowan, "The monetary policy is defined as discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest and (c) the availability of money."

Monetary policy is not an end in itself, but a means to an end. It involves the management of money and credit for the furtherance of the general economic policy of the government to achieve the predetermined objectives. There have been varying objectives of monetary policy in different countries in different times and in different economic conditions.

Different objectives clash with each other and there is a problem of selecting a right objective for the monetary policy of a country. The proper objective of the monetary policy is to be selected by the monetary authority keeping in view the specific conditions and requirements of the economy. Various objectives or goals of monetary policy are:

  1. Neutrality of Money
  2. Price Stability
  3. Economic growth
  4. Exchange Stability
  5. Full Employment