Two important strategies for the economy are fiscal policy and monetary policy. Both types of policies are applied to promote economic growth and development. The article below will help us better understand Expansionary monetary policy and important things to know about it. Let’s explore details with Learn Forex Trading in the following content.
Overview of Expansionary monetary policy
Let’s learn an overview of monetary policy through the following content. Aim to improve knowledge and increase efficiency in your investment process.
What is the concept of Expansionary monetary policy?
Expansionary monetary policy is a central bank strategy. The purpose is to expand the money supply in the economy. This is usually done by central banks buying financial assets. Such as government bonds or stock paper, from the private market. When the central bank buys these assets, it creates new currency and injects it into the financial system.
The main goal of this policy is usually to reduce interest rates and increase money supply. To promote financial activities, and increase investment and consumption opportunities. Thereby stimulating stronger economic growth. However, using this policy can also come with risks. Examples include inflation and financial instability. Therefore, it needs to be done carefully and flexibly according to the specific economic situation.
See more: For traders to succeed with economic calendar
Features of Expansionary monetary policy
To better understand monetary policy, there are specific characteristics that need to be identified. Monetary policy is not just about tightening or loosening credit. It is also related to the process of withdrawing or supplying reserves in the economy. The goal is to create more favorable conditions for banks to meet the market’s credit needs.
In addition, Expansionary monetary policy also includes control and adjustment of other credit costs. For example, controlling guarantees for securities being traded. Done through brokers at OTC (Over-the-Counter) exchanges.
These measures not only affect the size of credit but also ensure stability and transparency in the financial system. At the same time, it can affect both the flexibility and efficiency of financial markets. Understanding these aspects helps determine monetary policy. At the same time, it helps realize its importance in macroeconomic management.
When should you apply the Expansionary monetary policy?
Economies operate according to business cycles. There are periods of recession, recovery, and development. These are cyclical economic fluctuations to which policy needs to respond by changes in real GDP and inflation rates. Adjustments to monetary policy are common in response to these changes.
In contrast to tight monetary policy, Expansionary monetary policy is implemented to maintain financial stability and promote economic growth. Of these two strategies, loose monetary policy is often considered a good measure. Aims to bring the economy through the economic recession period. This is usually achieved by injecting money into the economy and stimulating economic growth.
When a country’s economy stagnates or shows signs of recession, the Central Bank evaluates the causes. At the same time, based on factors affecting this condition. Typically, rising interest rates and high inflation are the main factors that cause economic recession. Especially when the two get out of control. However, cyclical fluctuations in business can lead to deviations. Due to the occurrence of unforeseen events or natural disasters. It affects the short-term productive capacity of the economy. At the same time, it also has a long-term impact.
In addition, readers need to understand more about the organization of the FED to be able to know and improve their investment efficiency. Because the FED has a great influence on economic management with several important policies.
Tools of foreign exchange policy in terms of expansionary currency
Here are 4 tools that banks often apply with Expansionary monetary policy :
Open financial market operations
This is a measure implemented by the State Bank (SBV). Aims to loosen monetary policy by purchasing valuable papers on the open market. Mainly State treasury bills. To increase the money supply in the financial system.
A specific example is when the State Bank wants to increase the amount of money in circulation, they can buy a certain amount of securities. In case the State Bank buys securities from Commercial Banks. This leads to an increase in commercial banks’ cash reserves. Because commercial banks receive money from the State Bank when selling securities. If the SBV buys securities from the public, they will receive money from the sale of securities. Then transfer to deposit accounts at Commercial Banks. This helps increase the money supply in the system and promotes monetary easing.
Required reserve ratio
The required reserve ratio is the ratio between the amount of money that the Central Bank requires Commercial Banks to reserve and the total amount of money mobilized. It defines the level of assurance that commercial banks need to maintain.
Changes in the required reserve ratio have a direct effect on the money supply. In case the State Bank (SBV) decides to loosen monetary policy. The required reserve ratio can decrease, thereby increasing the money supply. Thus, adjusting the required reserve ratio is a way for the State Bank to regulate the amount of money in the economy.
This is an important tool for adjusting the money supply. With broad impact from the State Bank. Small changes in the required reserve ratio can lead to a significant increase in the money supply in the market. This not only helps the State Bank pump money into the economy. At the same time, it also reduces capital costs for banks. However, it should be noted that the flexibility of this tool may be reduced due to the slow and complicated capital disbursement process of commercial banks.
Monetary easing tool
Quantitative easing, abbreviated as QE (Quantitative Easing). This is a process that the central bank carries out by purchasing several securities in the market. To increase money supply and provide liquidity to banks.
Considered a “non-traditional” tool, quantitative easing is the method used by State Banks (SBV). Aims to increase money supply through asset purchase and sale transactions on the market. At the same time, it also affects their asset structure. The term “non-traditional” is applied because SBVs often apply “traditional” monetary policy measures. Mainly through adjusting operating interest rates, usually short-term interest rates. This then affects long-term interest rates through price rigidity. Finally, it corresponds to investment and consumption in the economy.
Expansionary monetary policy Quantitative easing represents a unique monetary strategy. When short-term interest rates are too low or close to zero, conventional measures applied in the open market become ineffective. Instead, the central bank chooses to buy a series of certain assets. For example, government bonds or other securities. To increase money supply and stimulate lending and investment activities.
Foreign exchange policy on exchange rate levels
Exchange rate policy sensitively affects many aspects of the economy. Including the situation of production, import, and export of goods, finance, currency, international balance of payments, investment capital attraction, and national reserves. The nature of the exchange rate is not a direct tool of monetary policy. Because it does not affect the amount of currency in the financial system. However, in many countries, especially those undergoing economic transition. The exchange rate is considered an important support tool for monetary policy.
When the exchange rate is low, it can attract foreign investment. At the same time, increases foreign exchange reserves and improves system liquidity. This may lead to a decrease in deposit interest rates. At the same time, it promotes money supply growth and creates favorable conditions for economic activities.
See more: Instructions for registering an XTB account
The important role of Expansionary monetary policy
Expansionary monetary policy plays an important role in regulating and providing money to the entire economy when it is in difficulty. This way helps the market recover and develop. As follows:
- Economic growth: Loose monetary policy focuses on stimulating economic growth. Providing more money into the market, directly affects interest rates, inflation, and national spending. When the economy shrinks, GDP falls.
- Reduce unemployment rate: Monetary easing boosts consumption and boosts business activity, increasing labor demand. This helps minimize the unemployment rate. Because many jobs are created to meet increased production and consumption needs.
- Stabilizing the financial market: Loose monetary policy helps the Government stabilize interest rates and prices in the market. This supports financial market stability and also contributes to controlling the foreign exchange market and strengthening the value of the local currency.
- Cash flows into stocks: When the Government implements loosening policies, traditional savings interest rates decrease significantly. This makes the savings channel less attractive. Savings deposits are redirected to other investment channels, especially the stock market. At the same time, businesses are encouraged to borrow money to expand their business. Create opportunities for investors to evaluate and invest in stocks with growth potential.
The important role of Expansionary monetary policy
Conclude
Hopefully, this article has helped you gain a deeper insight into the concept of Expansionary monetary policy. In general, all fluctuations in monetary policy affect fluctuations in the macroeconomy. Always accompany and update financial and stock information at Learn Forex Trading so you don’t miss useful information.
Frequently asked questions
What is the main goal of expansionary monetary policy?
The main goal of this policy is to promote economic growth and reduce unemployment. At the same time, it helps maintain price stability in the economy.
How does expansionary monetary policy affect interest rates?
Normally, this expansionary policy can reduce interest rates. Because expanding the money supply creates pressure to reduce interest rates to stimulate borrowing and investment.
Why do central banks implement expansionary monetary policy?
The central bank implemented an expansionary policy in response to the economic downturn. At the same time, it enhances liquidity and encourages spending and investment.
