Accommodative Monetary Policy - Explained
What is Accommocative Monetary Policy?
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What is Accommodative Monetary Policy?
Accommodative monetary policy, also known as easy monetary policy or loose monetary policy, allows the fiscal reserve to increase in relation to national income and the positive function of money demand. This policy generally includes a lowering of interest rates. The purpose of the policy is to energize the national money stock. Banks and other economic institutions are responsible for the implementation of accommodative monetary policy.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
What does Accommodative Monetary Policy really mean?
Accommodative monetary policies are often put into place to prevent a weak aggregate demand as this can result in an economic recession. During this time citizens prefer to save money as opposed to investing. As part of this policy, bankers see to incentivize with an expansive monetary measure. The hope is to move toward economic growth and the expansions of companies. By utilizing various methods of stimulus, banks seek to provide the nation with a restorative tonic complete with the production of goods and services. The side effect of the tonic is an increase in the level of income citizens see. It also encourages businesses to grant more credit to both businesses and private citizens. Both GDP growth below potential and two consecutive quarters of negative growth give reasons to enact accommodative monetary policy. Other considerations are a minimum investment in capital goods, a steady rise in the unemployment rate, and poor inflationary pressures. When formulating accommodating monetary policies, it is important to take into account inflation and interest rates. Through management of inflation and interest rates, policymakers seek to increase the national fiscal supply. These policies and variables are reflected in national bank mandates. If the amount of money in circulation within a nation is low, the government often enacts widespread accommodating monetary policies to increase the ready money in respective territories. However, in other situations, different methods can be utilized in a restrictive monetary policy.
Methods of Expansive Monetary Policies
Banks and governments alike can employ several mechanisms to carry out accommodating monetary policies. The following methods are the most commonly employed measures related to expansive monetary policies.
- Modify the permanent facilities. While increasing the fiscal quota in circulation through lowering interest rates, financial institutions grant more credit to both private citizens and corporations thereby increasing the amount of money flowing in the economy.
- Reduction of the cash ratio. By reducing the cash ratios, financial institutions will have more fiscal liberty in allocating money to credits and loans instead of covering cash ratios.
- Operations in the Open Market: Through careful analysis of objectives, financial institutions can choose one of the following open market operations:
- The main financing operations require the national bank lowering the official interest rate.
- There is also the ability to buy financial assets through special structural operations. The most well known is the purchase of government debt or government bonds. This creates a fiscal innoculation for the economy. Ideally, the purchases will be used to reinvest in the market.
- Non-conventional Monetary Policies. There are policies that can be put into action if the conventional methods do not appear to be working. One example is helicopter money.
While ideally these practices and policies would stimulate economic growth, it is vital to separate the concept of accommodative monetary policy with economic growth. The effects of accommodative monetary policies may not effect for years. In addition, other parameters can affect the successfulness of accommodative monetary policies such as inflation. If not enacted correctly, the reverse of desired outcomes may appear.
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