Monetary Policy

Monetary policy is the control that a country's central bank or government exercises over the money supply and credit or, alternatively, over a short-term interest [Page 1398]rate. Along with fiscal policy, it is the most important policy for achieving macroeconomic stability. Stability is usually taken to mean low and stable inflation, real interest rates compatible with reasonable levels of saving and investment, sufficient financing of economic activity, and a stable and competitive exchange rate.

Implementing monetary policy is the job of the central bank (such as the Federal Reserve in the United States, the European Central Bank in the euro zone, the Bank of England, and the Bank of Japan): a public financial institution that specializes in controlling the money supply, credit, and interest rates. Ultimate ...