Monetary Policy
Refresher reading access
Introduction
Central banks play several important roles in modern economies. These roles include being the monopoly supplier of the currency, the banker to the government and the bankers’ bank, the lender of last resort, the regulator and supervisor of the payments system, the conductor of monetary policy, and the supervisor of the banking system. Central banks have three primary tools available to them: open market operations, the refinancing rate, and reserve requirements. The success of central banks is thought to depend on three key concepts: central bank independence, credibility, and transparency. Both fiscal and monetary policy can alter aggregate demand, but they do so through differing channels with differing impacts on the composition of aggregate demand.
Learning Outcomes
The candidate should be able to:
- describe the roles and objectives of central banks
- describe tools used to implement monetary policy tools and the monetary transmission mechanism, and explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates
- describe qualities of effective central banks; contrast their use of inflation, interest rate, and exchange rate targeting in expansionary or contractionary monetary policy; and describe the limitations of monetary policy
- explain the interaction of monetary and fiscal policy
1.25 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.