Financial policy refers to the government or central bank system to influence economic activity, taking control of various measures, especially in order to control the money supply and interest rates. Achieving or maintaining a specific policy goal as inflation, achieving full employment or economic growth. Direct or indirectly, through the open market program and the lowest bank reserve setting. Monetary theories and monetary policies the epitaph of the same currency.
Basically the policy related to financial issues In general, the government and country’s financial authorities accept the policies for regulating money supply.
With the help of that policy, the amount of money supply, currency and loan control is regulated. Money does not just play the role of exchange. They affect economic activities in many ways. For example, there is inflation in the country when the amount of money and loan increases. And when the amount of money supply and debt reduces, there is recession, currency contraction and unemployment in the country.
Therefore, it is necessary to keep the money supply and loan amount at an acceptable or desirable level. Therefore, the measures taken by the government and financial authorities to control the financing of the country’s economic stability are called Monetary Policy.
The types of monetary policy are summarized below:
In order to increase production, income, employment and investment, to reduce the economic recession or unemployment.
If the economy continues to have inflation for a long time, then the government adopts this policy to reduce production, income, employment and investment.
If the financial policy of the country is not affected by the income, production, employment, investment, recession, unemployment etc are not affected, it is called neutral or indifference. The developed countries mainly adopt this policy to maintain their economic stability at full discretion.
Instruments of Monetary Policy
The fundamental goal of monetary policy is to achieve economic stability and achieve complete reciprocity through price stability. And with this goal, the government will use the means of controlling money supply as financial instruments or tools. Such as
- Coin currency and paper notes issue control:
If there is a shortage of money supply in the country, the government can introduce new coin and paper notes to increase the amount of money needed. If the government is concerned about the inflationary pressure due to the extra money supply, the government can cancel the old coin or paper notes, or ban specific quantities of the field.
- Open market activities:
Through the central bank or any other financial institution, the government sells bonds, savings certificates, bonds etc. in open market. When money supply increases in the economy, when inflation prevails, the government sells various types of securities, savings certificates and bonds at attractive interest rates to the public. As a result, the money supply is reduced in the market. On the contrary, in order to reduce the recession or unemployment, the government increases the cash money in the hands of the people, if they purchase the loan papers and savings certificates, they will increase the money supply.
- Bank rate change:
Central banks provide loans at commercial banks. Under the government order, the central bank regulates the supply of money by changing its bank rates.
- Reserve rate changes:
Commercial banks have to keep a portion of cash deposited daily from their depositors in central bank. With the Reserve Bank increasing the banks’ lending capacity, the reduction in the money supply. Leads in contrast.
- Quality Tool:
In addition to the above quantitative tools, there are qualitative tools. Such as moral pressure, encouragement, loan rationing, and special loans are prohibited.
Yale University, Economics