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Monetary policy stands for the whole process, by which the central bank (monetary authority) controls the money supply, the availability of money and the cost of money (also known as borrowing costs or interest rates) in order to attain its objectives, usually oriented towards economic growth and overall economic stability.

We can say that monetary policy deals with the relationship between interest rates in the economy and the total supply of money.

Three objectives of monetary policy

Central banks have three monetary policy objectives. The most important is to manage inflation. The secondary objective is to reduce unemployment, but only after controlling inflation. The third objective is to promote moderate long-term interest rates.

To achieve their goals, central banks use monetary policy mainly to control the following：

●the interest rates tied to the cost of money,

●the rise in inflation,

●the money supply,

●reserve requirements over banks (the portion of depositors’ balances that commercial banks must have on hand as cash)

●lending to commercial banks (via the discount window)

In order to find the balance between a reasonable inflation rate and a healthy economic growth, central banks implement two types of monetary policy – accommodative and restrictive.

Accommodative monetary policy

When the monetary authority follows the course of an accommodative (expansive) monetary policy, this means that it increases the money supply in the country. As we already noted, this leads to increased business investments, higher consumer spending and therefore, spurred economic growth through lower interest rates (cheaper borrowing).