Monetary Policy

Monetary policy is the process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. For example, it is clearly stated in the Federal Reserve Act that the Board of Governors and the Federal Open Market Committee should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
Governments and central banks have taken both regulatory and free market approaches to monetary policy.

Some of the tools used to control the money supply include:

• currency purchases or sales increasing or lowering government spending
  
• increasing or lowering government borrowing
  
• the rate at which the government loans or borrows money
  
• manipulation of exchange rates
  
• taxation or tax breaks on imports or exports of capital into a country
  
• raising or lowering bank reserve requirements
  
• regulation or prohibition of private currencies

For many years much of monetary policy was influenced by an economic theory known as monetarism. Monetarism is an economic theory which argues that management of the money supply should be the primary means of regulating economic activity. The stability of the demand for money prior to the 1980s was a key finding of Milton Friedman and Anna Schwartz supported by the work of David Laidler, and many others.