Implementation of monetary policy. Money-credit policy

Monetary policy is to change the money supply ( MS ) in order to stabilize the aggregate output, employment and price level. Or else: monetary policy causes an increase MS during a recession to encourage spending, and during inflation, on the contrary, limits MS to limit costs.

Monetary regulation, in contrast to budgetary regulation, relies on the instruments of the market itself. Indicators such as the interest rate, the volume of monetary and credit resources and some others become "benchmarks", indicators that are directly influenced and through which the "impulse" of monetary policy is transmitted. Applying this or that indicator, the state expects to cause changes in the capital market conjuncture.

The ultimate goal of regulation is to influence the economic environment and create conditions for balanced economic growth. A necessary condition for achieving the set goals is an adequate response of investors and consumers to changes in the volume and structure of cash resources. Monetary and credit factors of development themselves should be fairly easy to regulate.

Objectives and instruments of monetary policy can be grouped as follows.

End ( strategic ) goals :

1) mitigation of cyclical fluctuations in production and employment.

2) ensuring stable non-inflationary growth.

Interim targets :

a) money supply;

b) interest rate;

c) exchange rate.

The strategic goal of monetary policy is to ensure price stability, full employment and growth in real output. However, the current monetary policy is oriented towards more specific and accessible goals than this strategic goal.

A condition for conducting a full-fledged monetary policy is the preliminary determination of the following main parameters:

a) the rate of growth of prices (inflation) and the level of inflationary expectations (the level of inflation is one of the conditions for determining the value of the interest rate, the latter allows one to assess the degree of rigidity of the monetary policy being pursued);

b) monetary (credit) multiplier (the value of the multiplier is one of the conditions for determining the measure of sufficiency of emission decisions);

c) the actual level of the interest rate;

d) the state of the money market.

Regulation methods in the field of monetary circulation can be divided into direct and indirect.

At direct regulation the following instruments: a) credit limits; b) direct regulation of the interest rate;

Instruments indirect regulation are:

a) open market operations;

b) change in the rate of required reserves;

c) change in the discount rate (refinancing rate)

d) voluntary agreements.

The efficiency of using indirect regulatory instruments is closely related to the degree of development of the money market. In transition economies, especially at the first stages of transformation, both direct and indirect instruments are used, with the former being gradually replaced by the latter. Often, in the process of the formation of the banking system in countries transitioning to market relations, the strengthening of the degree of independence of the Central Bank in the conduct of monetary policy is accompanied by the desire of monetary power to achieve the ultimate goal, while it is really able to control only certain intermediate nominal values.

Consider the tools for indirect regulation of the monetary system.

Open market operations- the most important means of control MS in developed countries. The use of this instrument of monetary regulation in countries where the stock market is at the stage of formation is very difficult. The term "open market transactions" refers to the buying and selling of government (short-term) securities (usually in the secondary market, since the Central Bank's activities in primary markets are prohibited or restricted by law in many countries) to commercial banks, firms and the general public. Often, such transactions are carried out by the Central Bank in the form of repurchase agreements (repurchase agreements). In this case, the bank, for example, sells securities with the obligation to redeem them at a certain (higher) price after a certain period of time. The interest for the money provided in exchange for the securities is the difference between the sale price and the buyback price. Buyback agreements are widespread in the activities of commercial banks and firms.

The most important aspect of open market operations is that when the central bank buys government securities from commercial banks, the reserves, and therefore the lending capacity, of commercial banks increase. On the contrary, when the Central Bank sells government securities, the reserves of commercial banks and lending opportunities decrease. Thus, influencing the monetary base through operations in the open market, the Central Bank regulates the size of the money supply in the economy.

The purchase and sale of government securities is carried out for two purposes:

· Financing and refinancing of the current state budget deficit and public debt;

· Macroeconomic regulation.

Change in the required reserves ratio... Mandatory reserves are the portion of the amount of deposits that commercial banks must keep in the form of interest-free deposits with the Central Bank (storage forms may vary by country). Required reserve ratios differ in size depending on the types of deposits (for example, for term deposits they are lower than for demand deposits), as well as depending on the size of banks (for small banks, they are usually lower than for large ones). The higher the Central Bank sets the required reserve ratio, the smaller the proportion of funds that can be used by commercial banks for active operations. Either banks will lose excess reserves, reducing their ability to create money through lending, or they will find their reserves insufficient and will be forced to reduce their checking accounts and thus the money supply. Increase in the rate of reserves ( rr ) reduces the money multiplier and leads to a reduction in the money supply. Lowering the reserve rate translates the required reserves into surplus and thereby increases the ability of banks to create new money through lending. Thus, by changing the rate of required reserves, the Central Bank influences the dynamics of money supply. An increase in the reserve ratio increases the amount of required reserves that banks must hold.

Discount rate (refinancing rate). Just as commercial banks collect interest payments on their loans, the Central Bank collects interest payments on loans made to commercial banks. This rate of interest is called the "discount rate". This transaction is similar to obtaining a loan from a private individual in a commercial bank.

From the point of view of commercial banks, the discount rate represents the cost of acquiring reserves. Consequently, the fall in the discount rate encourages commercial banks to acquire additional reserves by borrowing from the Central Bank. Commercial bank loans backed by these new reserves increase MS ... And, conversely, an increase in the discount rate reduces the interest of commercial banks in obtaining additional reserves by borrowing from the Central Bank, and, consequently, the operations of commercial banks on granting loans also decrease. In addition, when receiving a more expensive loan, commercial banks also raise their interest rates on loans. A wave of credit contraction and money appreciation is sweeping through the system. The money supply in the economy is declining. Therefore, the increase in the discount rate is in line with the Central Bank's desire to limit MS ... Consequently, by manipulating the level of the discount rate, the Central Bank carries out a kind of regulation of the “credit price”.

By changing the rate, the Central Bank gives the private sector a signal about the desired activation or, conversely, curbing business activity. If the private sector doesn’t respond, stronger leverage is used, such as open market operations.

Voluntary agreements. The central bank seeks at times to conclude business agreements with commercial banks. This method allows you to make decisions quickly and without much bureaucracy.

With the help of these instruments, the Central Bank implements the objectives of the monetary policy:

Maintaining the money supply at a certain level (tight monetary policy) or

· Maintaining the interest rate at a certain level (flexible monetary policy).

Monetary policy options are interpreted differently in the money market chart. When constructing a graphical scheme of the money market, it was assumed that the money supply is graphically represented in the form of a vertical line, i.e. that the money supply is constant and does not depend on the interest rate. In reality, the money supply depends on the goals set for the country's monetary system.

1. A tight policy of maintaining the money supply corresponds to a vertical money supply curve at the level of the target money supply, i.e. maintaining the amount of money in circulation at a constant level ( MS 1 in fig. 13.3).

2. The goal of monetary policy can also be to maintain a fixed rate of interest. Flexible monetary policy can be represented by a horizontal direct money supply at the level of the target value of the interest rate ( MS 2 in fig. 13.3).

3. The third option (intermediate) of the graphical display of the money supply is an inclined curve ( MS 3 in fig. 13.3). This form of the money supply graph shows that monetary policy allows for changes in both the money supply in circulation and the rate of interest.

Depending on the slope of the curve MS changes in the demand for money will have a greater impact either on the money supply or on the interest rate.

MS- the schedule of money supply with monetary policy aimed at maintaining a constant supply of money in circulation; MS 2 - money supply schedule with flexible monetary policy; MS 3 - the money supply schedule assuming changes in both the mass of money in circulation and the rate of interest.

The choice of a particular goal of monetary policy depends on the factors that caused the shift in the demand for money.

1. If this shift is caused by a cyclical change in the real volume of production, then it is desirable to "smooth out" these changes. In the case of cyclical "expansion" - to allow an increase in the rate of interest; the consequence of the rise in interest rates will be a decrease in business activity. And, conversely, in the event of a cyclical downturn, or "contraction" - to allow a decrease in the rate of interest and to achieve an increase in economic activity. In this case, the graphical display of the money supply will be a vertical or oblique curve MS (fig.13.4, a).

2. If the shift in the demand for money is caused solely by the rise in prices, then any increase in the money supply will "unwind" the inflationary spiral. The goal of monetary policy in this case will be to maintain the money supply in circulation at a certain fixed level. The graphical display of the money supply in this case will be a vertical line MS (fig.13.4, a).

3. Considering the money market, it was assumed that the velocity of circulation of the money supply is constant. But it can and does change under the influence, for example, of changes in the organization of money circulation in the country, which will affect the rate of interest, and the volume of production, and prices (the equation of exchange). If the Central Bank sets the task of neutralizing the impact of changes in the velocity of money circulation on the national economy, it chooses a flexible monetary policy: the amount of money in circulation should increase in the same proportion as the a certain proportion of the money supply must change in the same proportion. In this case, the graphical display of the money supply will be a horizontal line (Figure 13.4, b).

Plan

1.General information about the monetary policy of the state

2. Types of monetary policies

3. Methods of monetary policy

Monetary policy of the state

Monetary (or monetary) politics is the policy of the state that affects the amount of money in circulation in order to ensure price stability, full employment of the population and growth in real production. The Central Bank implements the monetary policy.

The impact on macroeconomic processes (inflation, economic growth, unemployment) is carried out through monetary regulation.

Usually, the monetary policy of the Central Bank is aimed at achieving and maintaining financial stabilization, first of all, strengthening the exchange rate of the national currency and ensuring the stability of the country's balance of payments.

Monetary regulation is a set of specific measures of the central bank aimed at changing the money supply in circulation, the volume of loans, the level of interest rates and other indicators of money circulation and the loan capital market.

Monetary policy is an integral part of the unified state economic policy. State economic policy should include measures to solve problems in each block. The central bank fulfills its part - monetary policy, it is responsible for its implementation.

Types of monetary policies

Hard - is aimed at maintaining a certain amount of money supply.

Flexible - is aimed at regulating the interest rate.

There are types of monetary policy:

Stimulating - is carried out during a recession and aims to "cheer up" the economy, stimulate the growth of business activity in order to combat unemployment.

Restraining - is carried out during a boom and is aimed at reducing business activity in order to combat inflation.

An incentive monetary policy is the central bank's measures to increase the money supply. Her tools are:

reduction in reserve requirements

reduction in the discount rate

purchase of government securities by the central bank.

Restraining (restrictive) monetary policy is the use of measures by the central bank to reduce the supply of money. These include:

increase in reserve requirements

increase in the discount rate

sale by the central bank of government securities.

Monetary policy methods

Monetary policy methods - a set of techniques and operations through which the subjects of monetary policy influence objects to achieve their goals.

Direct methods - administrative measures in the form of various directives of the Central Bank concerning the volume of money supply and prices in the financial market. Limits on the growth of lending or attracting deposits are examples of quantitative controls. The implementation of these methods gives the fastest economic effect from the point of view of the central bank for the maximum volume or price of deposits and loans, for the quantitative and qualitative variables of monetary policy. When using direct methods, time lags are reduced. Time lags are a certain period of time between the moment the need for a particular measure in the field of monetary policy arises and the realization of such a need, as well as between the awareness of the need, the formation of an opinion and the beginning of implementation.

Indirect methods of regulating monetary policy affect the motivation of the behavior of business entities using market mechanisms, have a long time lag, and the consequences of their application are less predictable than when using direct methods. However, their application does not lead to market distortions. Accordingly, the use of indirect methods is directly related to the degree of development of the money market. The transition to indirect methods is characteristic of the global liberalization process, increasing the degree of independence of central banks.

General and selective methods are also distinguished:

General methods are predominantly indirect, affecting the money market as a whole.

Selective methods regulate specific types of credit and are mainly prescriptive in nature. Thanks to these methods, particular problems are solved, such as limiting the issuance of loans to some banks, refinancing on preferential terms.

Operations in open markets.

The sale (purchase) of the Central Bank of government securities in open markets by commercial banks reduces (increases) the reserves of banks, and therefore reduces (increases) the credit capabilities of banks, increasing (decreasing) the interest rate. This method of monetary policy is applied in the short term and is highly flexible.

Change in the minimum reserve rate.

An increase in the central bank's reserve ratio reduces excess reserves (which can be lent), thereby reducing the bank's ability to expand the money supply through lending. This means of regulating the money supply is usually applied in the long run.

Change in discount rate.

The rate charged by the Central Bank for loans presented to commercial banks is called the discount rate. With a decrease in the discount rate, the demand of commercial banks for loans from the Central Bank increases. At the same time, the reserves of commercial banks and their ability to provide loans to entrepreneurs and the population are increasing. The bank interest for a loan is also decreasing. The supply of money supply in the country is increasing. On the contrary, when it is necessary to reduce business activity by reducing the money supply in the country, the central bank raises the discount rate. Raising the discount rate is also a way to fight inflation. Depending on the economic situation, the central bank resorts to a policy of “cheap” and “expensive” money.

Cheap money policy

It is carried out during a period of low market conditions. The central bank increases the supply of money by buying government securities on the open market, lowering the reserve rate, lowering the discount rate. This lowers the interest rate, increases investment and increases business activity.

Expensive money policy

It is carried out by the Central Bank, first of all, as an anti-inflationary policy. In order to reduce the money supply, money issue is limited, government securities are sold on the open market, the minimum reserve rate is increased, and the discount rate is increased.

Along with the listed methods of state regulation, which have an internal economic orientation, there are special measures of external economic regulation. These include measures to stimulate the export of goods, services, capital, know-how, and management services. These are export crediting, guaranteeing export credits and investments abroad, introducing and abolishing quotas, changing the value of duties in foreign trade.

Monetary (monetary) policy - a set of economic measures, with the help of which the monetary processes of the country are regulated in order to stabilize the economy (therefore, along with fiscal (fiscal policy, it is a kind of stabilization (countercyclical) policy). It is aimed at smoothing out cyclical fluctuations in the economy and is used to influence the economy , first of all, in the short run .

The main objectives of monetary policy are as follows:

1. Ensuring a stable level of aggregate output (GDP);

2. Ensuring full employment of resources;

3. Ensuring a stable price level;

4. Ensuring an equilibrium of the balance of payments.

The object of regulation is the money market. and above all money supply... Monetary policy is determined and implemented central bank of the state (subject of regulation) .

The goals and instruments by which the state implements the money supply and regulation of the money supply constitute the content of monetary policy.

The main objectives of monetary policy are:

1. Ensuring the stability of the national currency in order to efficiently make payments and settlements.

2. Development of the rules of monetary circulation, their regulation and control over their implementation.

3. Impact on the economic environment by changing the money in circulation.

Within the framework of monetary policy, methods of direct and indirect regulation of the monetary sphere are applied. Direct methods have the character of administrative measures in the form of various directives of the central bank. Indirect methods regulation of the monetary sphere affect the motivation of the behavior of business entities and the help of market mechanisms.

In world practice, central banks use the following monetary policy instruments:

1. Changes in the required reserves of commercial banks- in accordance with this norm, the amount of money is calculated, which a commercial bank has no right to lend and is obliged to keep in its account with the central bank. Mandatory reserves perform the function of deposit insurance, i.e. provide commercial banks with sufficient liquidity and prevent their insolvency in the event of a massive withdrawal of deposits.

The mechanism of action of this instrument of monetary policy is as follows:

With an increase in the required reserve ratio, there is a reduction in free reserves of banks, which could be used for lending operations, i.e. decrease in the money supply;

If there is a need to increase the money supply, the Central Bank lowers the reserve requirement.

It should be noted that a change in the required reserve ratio has a powerful potential, but in practice this mechanism is used with caution, since even a slight change in the reserve ratio can cause significant changes in the credit policy of commercial banks.

2. Change in discount rate of interest(under which the central bank grants credit to commercial banks). The essence accounting policies is that the central bank sets a certain percentage, called the discount rate or refinancing rate, for providing a loan to a commercial bank to replenish reserves. Using this instrument of monetary policy, the central bank can actively influence the increase or decrease in the amount of money in circulation. Thus, with a decrease in the interest rate, commercial banks can increase their reserves and thereby expand the supply of money. Conversely, an increase in the discount rate leads to a decrease in bank reserves, and, consequently, to a decrease in the money supply. The central bank tries to pursue a stable and predictable accounting policy. When conducting accounting policy, the central bank proceeds from the tasks of stabilizing the country's economic development, therefore, during an economic recession, it creates conditions for expanding the supply of money, and during a period of "overheating" of the economic situation, on the contrary, it constrains the growth of the money supply.

3. Operations on the open market with government securities. Open market policy is the main instrument of the monetary policy of the developed countries of the world. The purpose of this policy is to promptly change the money supply through the purchase and sale of securities. Open market operations are carried out by the central bank in cooperation with a group of large banks and other financial and credit institutions. So, for example, if there is a surplus of money supply in the money market, then the central bank begins to actively sell government securities, most often bonds, to banks or the public. The purchase of securities leads, ultimately, to a reduction in bank reserves, and, consequently, to a decrease in the supply of money. At the same time, the interest rate rises. When there is a shortage of money in the money market, the central bank pursues a policy aimed at expanding the money supply. This is achieved by buying up government securities from banks and the public at a favorable rate for them by the central bank. Such an operation ultimately leads to an increase in bank reserves. At the same time, the interest rate goes down.

Thus, the central bank can pursue a stimulating or restrictive policy of the work of commercial banks and the monetary sphere.

Monetary policy is a set of measures and the government in the field of money circulation and credit.

Central bank monetary policy (monetary policy)- This is a set of government measures that regulate the activities of the monetary system, the loan capital market, an order with the aim of achieving a number of general economic goals: stabilizing prices, rates, strengthening the monetary unit.

Monetary policy is an essential element.

All influences are reflected in the value of the aggregate social product and.

• Containment
• Security
• Regulation of rates
• Reducing cyclical fluctuations in the economy
• Ensuring the stability of the balance of payments

Principles of monetary and credit regulation of the economy

Monetary regulation of the economy is carried out on the basis of the principle compensation regulation, which assumes the following:

• monetary policy restriction, which involves the limitation of credit operations by increasing reserve requirements for participants in; raising the level; limiting the growth rate in circulation in comparison with the mass of commodities;
• monetary policy expansion, which involves the promotion of credit operations; reduction of reserve norms for subjects of the credit system; falling lending rates; acceleration of the turnover of the monetary unit.

Monetary policy instruments

The development and implementation of monetary policy is an essential function. He has the ability to influence the volume of money supply in the country, which in turn allows you to regulate the level of production and employment.

• Regulation of official reserve requirements
  It is a powerful means of influencing the money supply. The amount of reserves (part of bank assets that any commercial bank is obliged to keep in the accounts of the central bank) largely determines its lending capabilities. Lending is possible if the bank has enough funds in excess of the reserve. Thus, increasing or decreasing reserve requirements can regulate the lending activity of banks and, accordingly, influence the money supply.

• Operations in open markets
  The main instrument for regulating the supply of money is the purchase and sale of government securities by the Central Bank. When selling and buying securities, the Central Bank tries to influence the volume of liquid funds of commercial banks by offering favorable interest rates. By buying securities on the open market, he increases the reserves of commercial banks, thereby contributing to an increase in lending and, accordingly, an increase in the money supply. The sale of securities by the Central Bank leads to the opposite consequences.
• Regulation of the discount rate of interest (discount policy)
  Traditionally, the Central Bank provides loans to commercial banks. The rate of interest at which these loans are made is called the discount rate of interest. By changing the discount rate of interest, the central bank affects the reserves of banks, expanding or reducing their ability to lend to individuals and businesses.

The factors affecting supply, demand and interest rates can be grouped under the name “monetary policy instruments”. These include:

Interest rate policy of the Bank of Russia

The central bank sets minimum interest rates for its transactions. The refinancing rate is the rate at which a loan is provided by commercial banks, or it is the rate at which the bills are rediscounted from them.

The Bank of Russia may establish one or more for various types of transactions or pursue an interest rate policy without fixing the interest rate. Bank of Russia uses interest rate policy to influence market interest rates in order to strengthen the ruble.

Bank of Russia regulates the total volume of loans issued to them in accordance with the adopted guidelines of the unified state monetary policy, using the discount rate as a tool. Bank of Russia interest rates represent the minimum rates at which the Bank of Russia conducts its operations.

Interest rate policy of credit institutions being part of the national monetary policy, it has a significant impact on development and its stability. are usually free to choose specific interest rates on loans and deposits and use some indicators reflecting the state of the short-term money market as benchmarks in the implementation of interest rate policy. On the other hand, the central bank, in the targeting process, establishes intermediate monetary policy objectives that it can influence, as well as specific instruments to achieve them. This can be the refinancing rate or interest rates on central bank operations, on the basis of which the rate of short-term interbank lending is formed, etc.

The problems of identifying factors influencing the interest rate policy of commercial banks have worried specialists since the time of the formation of economic theory. However, answers to many questions have not yet been found. Modern research aimed at identifying the optimal rules for the implementation of national monetary policy is largely based on.

In theory and practice, methods of direct and indirect regulation of national monetary policy are considered. From the point of view of interest rate policy in the narrow sense (rates on credit and deposit operations, the spread between them), the instrument of its direct regulation is setting by the central bank of interest rates on loans and deposits of commercial banks, indirect instruments - setting the refinancing rate and the rate on the central bank's operations in the money and open markets.

Interest rates on loans and deposits as instruments of direct regulation are not often used in world practice. For example, the People's Bank of China sets rates that are considered indicative for the banking system. At the same time, the bank's policy is aimed at reducing the spread, which in the first half of 2006 was 3.65%, and by the end of 2009 - 3.06%, which indicates sufficient liquidity of the Chinese banking system.

In many countries, including Russia, the refinancing rate has become more of an indicative indicator giving the economy only an approximate benchmark for the value of the national currency in the medium term, since it is in an unchanged state for a long time, while real rates in the money market change every day.

Required reserve ratios

According to the existing legislation, commercial banks are obliged to deduct part of the attracted funds to special accounts c.

Since January 2004 The central bank set the following the amount of deductions to the compulsory reserve fund Bank of Russia: on accounts in rubles of legal entities and foreign currency of individuals and legal entities, as well as on accounts of individuals in rubles - 3.5%.

The maximum amount of deductions, that is, the required reserve ratio, is 20% and cannot be changed by more than 5% at a time.

This standard allows the Bank of Russia to regulate the liquidity of the banking sector.

The reserves serve as the current regulation of liquidity in the money market, on the one hand, and as a limiter for the emission of credit money, on the other.

In the event of a violation of the required reserve requirements, the Bank of Russia has the right to recover from the credit institution the amount of underpaid funds in an indisputable manner, as well as a fine in the prescribed amount, but not more than double.

Open market operations

Operations on the open market, which are understood as the purchase and sale of corporate securities by the Bank of Russia, short-term operations with securities with a later return transaction. The limit for open market operations is approved by the board of directors.

In accordance with the law of July 10, 2002 No. 86-FZ (as amended on October 27, 2008) "On the Central Bank of the Russian Federation (Bank of Russia)" more than 6 months, buy and sell bonds, certificates of deposit and other securities with a maturity of no more than 1 year.

Refinancing

Refinancing refers to the Bank of Russia lending to banks, including accounting and rediscounting of bills... The forms, procedure and conditions for refinancing are established by the Bank of Russia.

Refinancing of banks is carried out through the provision of intraday loans, overnight loans and Lombard credit auctions for up to 7 calendar days.

Currency regulation

Should be viewed from two sides. On the one hand, the Central Bank must monitor the legality of currency transactions, on the other hand, the change in the national currency in relation to other currencies, avoiding significant fluctuations.

One of the methods of influencing the exchange rate is the conduct of foreign exchange interventions or motto policies by central banks.

Foreign exchange intervention Is the sale or purchase of foreign currency by the Central Bank for the purpose of influencing the exchange rate and the total demand and supply of money. These, obviously, should include transactions for the purchase and sale of precious metals on the domestic market of the Russian Federation, the procedure for which is regulated by the letter of the Central Bank of the Russian Federation of December 30, 1996 No. 390.

The main objectives of the exchange rate policy in Russia are strengthening confidence in the national currency and replenishment of gold and foreign exchange reserves... At present, the monetary base is fully provided with gold and foreign exchange reserves.

Direct quantitative restrictions

Under the direct quantitative restrictions of the Bank of Russia, the establishment of limits on the refinancing of banks and the conduct of certain banking operations by credit institutions are accepted. The Bank of Russia has the right to apply direct quantitative restrictions in exceptional cases for the purpose of pursuing a unified state monetary policy only after consultation with the Russian government.

Guidelines for the growth of money supply indicators

The Bank of Russia may establish benchmarks for the growth of one or several indicators based on the main directions of the unified state monetary policy. In Russia, the main aggregate is the monetary aggregate.

Today, the monetary policy of central banks is guided by monetarist principles, where the Central Bank is tasked with tightly controlling the money supply, ensuring a stable, constant and long-term growth rate of the amount of money in the economy, equal to the GDP growth rate.

Other factors affecting demand, supply and interest rates include:

• the situation in the real sector of the economy;
• return on investment in production;
• the situation in other sectors of the financial market;
• economic expectations of business entities;
• the need of banks and other business entities for funds to maintain their liquidity.

The policy of cheap and expensive money

Depending on the economic situation in the country, the central bank pursues a policy of cheap or expensive money.

Cheap money policy

Typical for a situation of economic downturn and high level. Its goal is to make credit money cheaper, thereby increasing total spending, investment, production and employment.

To pursue a cheap money policy, the central bank can reduce the discount rate on loans to commercial banks or buy on the open market or reduce the reserve requirement, which would increase the money supply multiplier.

Expensive money policy

It is carried out with the aim of reducing the pace by reducing total costs and limiting the money supply.

• Increase in the discount rate of interest. Commercial banks begin to borrow less from the Central Bank, hence the supply of money is reduced.
• Sale of government securities by the central bank.
• Increase in the rate of reserve requirements. This will reduce the excess reserves of commercial banks and reduce the money supply multiplier.

All of the above instruments of monetary policy were related to indirect (economic) methods of influence. In addition to these general methods of monetary regulation, the whole bank also uses direct (administrative) methods designed to regulate specific types of credit. For example, a direct limitation of the size of bank loans for consumer needs.

Monetary policy has pros and cons. The strengths include speed and flexibility, which is less dependent on political pressure than fiscal policy. Problems in the implementation of monetary policy are created by cyclical asymmetry. The effectiveness of monetary policy can also decrease as a result of counter-directional changes in the velocity of money circulation.

Monetary policy(KDP) is also called the monetary policy of the state and is a set of measures taken by the Central Bank of the country by influencing the state of credit and monetary circulation. These measures serve as a way to regulate business activity, create favorable economic conditions for citizens to live and do business, strengthen the exchange rate of the national currency, maintain stability in the country and the stability of the balance of payments of the state.

What are the objectives of monetary policy?

The objectives of the government's monetary policy are:

• Inflation regulation
• Achievement of full employment of the population
• Regulation of economic growth rates
• Timely response to cyclical fluctuations in the economy
• Ensuring stability and regulation of the balance of payments

What are the instruments of monetary policy?

The main instruments of monetary policy are:

• Regulation of official reserve requirements

The regulation of official reserve requirements is a powerful tool by which the Central Bank carries out monetary regulation. Credit opportunities of commercial banks are largely determined by the amount of reserves that commercial banks are required to keep in the accounts of the Central Bank. A commercial bank can only provide loans if it has sufficient funds in excess of this reserve. Accordingly, by decreasing or increasing its requirements for the amount of reserves, the Central Bank regulates the lending activities of commercial banks, thereby affecting the volume of money supply.

• Operations in open markets

Operations in open markets are another instrument of monetary regulation. The main method in applying this instrument is the sale and purchase of government securities by the Central Bank. By purchasing securities on the open market, the Central Bank increases the volume of liquid assets of commercial banks, stimulating lending. Selling securities has the opposite effect.

Another type of operation in open markets is foreign exchange intervention. The central bank of the state sells or buys on the open market a certain amount of currency from its own, thereby weakening or strengthening the exchange rate of the national currency.

• Regulation of the interest (discount) rate

The interest or discount rate is the percentage at which the Central Bank lends to commercial banks. By raising or lowering the level of the interest rate, the Central Bank regulates the cost of loans, thereby affecting the ability of commercial banks to lend to enterprises and the population. The change in the interest rate also affects the exchange rate of the national currency. An increase in the interest rate causes an inflow of funds into the national currency and is considered a risk-free investment by investors.

What types of monetary policy are there?

In the modern financial world, it is customary to divide monetary policy into two types: soft ("pigeon") and tight ("hawkish") monetary policy.

• Soft monetary policy

Soft monetary policy is characterized by a gradual decrease in the interest rate by the Central Bank and keeping it at these levels for quite a long time, as well as the use of non-standard methods (a series of the US Federal Reserve System, LTRO programs and ECB quantitative easing).

A soft monetary policy is aimed at stimulating the state's economy by making lending cheaper, combating deflationary processes and accelerating inflation to certain target levels, but it leads to a decrease in the exchange rate of the national currency. Followers of soft monetary policy are called "doves", and policy, respectively, "doves".

• Tight monetary policy

A tight monetary policy is characterized by a consistent increase in the Central Bank's discount rate. Tight monetary policy is pursued by the central banks of states with stable economies, since such a policy requires increased stability of the state's financial system. An increase in interest rates also leads to an increase in the exchange rate of the national currency. The followers of tight monetary policy are called "hawks", and the policy, accordingly, "hawkish".

How does monetary policy affect Forex exchange rates?

Classic fundamental analysis assumes an increase in the exchange rate of the national currency with an increase in the interest rate (risk-free investment - the higher the interest rate, the more income an investor who has invested in the country's economy will receive) and a decrease in the exchange rate of the national currency with a decrease in the discount rate (the percentage of income from investments is minimal and not is of interest to investors).

In the Forex market, there is a concept of divergence (divergence) of monetary policies. For example, in 2014, the US Federal Reserve announced the beginning of the process of tightening monetary policy), and the ECB announced its intentions to ease its monetary policy. As a result, the EUR / USD currency pair has been declining throughout the second half of 2014.

The result of the divergence (divergence) of the monetary policies of the Fed and the ECB, EUR / USD currency pair, monthly chart

The currency interventions carried out by the Central Bank have a huge impact on the rate of currency pairs. For example, in 2014, with the help of interventions, the Central Bank of the Russian Federation held back the weakening of the ruble, and until the end of July 2015, the Bank of Russia was buying $ 200 million daily to replenish its reserves, thereby holding back the strengthening of the ruble.

It is widely known among traders and the SNB, which regularly intervened to weaken the Swiss franc, which enjoys increased popularity in quality. For example, the SNB's foreign exchange intervention on September 6, 2011 caused the USD / CHF pair to rise by almost 800 points in one trading day.

Result of SNB currency intervention, USD / CHF currency pair, H4 chart

Also, the exchange rate is strongly influenced by the statement of the Central Bank on the choice of one or another method of forming the national currency rate and warning of intentions, which are also called verbal interventions. For example, the announcement of the Bank of Russia about the refusal to regulate the ruble exchange rate was called "free floating" and caused a weakening of the Russian currency, the statement of the Fed about its intention to raise the interest rate caused the strengthening of the dollar, and in one day the EUR / CHF rate collapsed by more than 2000 points , causing a number of forex brokers to declare bankruptcy.

The result of the SNB's refusal to peg the franc to the euro, EUR / CHF currency pair, daily chart