A country’s economic objective is met by two types of policy:
- fiscal policy, and
- monetary policy.
Monetary policy is enacted by the country’s central bank. Fiscal policy is used by the government.
A country’s monetary policy deals with money, currency and interest rates. In India, monetary policy is set by the Reserve Bank Of India (RBI), being the central bank of India.
In the United States, the Federal Reserve Bank implements monetary policy for the country.
Here is the list of major central banks of various countries of the world;
| Country | Central Bank |
|---|---|
| India | Reserve Bank of India |
| USA | Federal Reserve |
| Cyprus, Austria, Greece, Spain, Slovenia, Netherlands, Italy, Ireland, Germany, France, and Finland | European Central Bank |
| Australia | Reserve Bank of Australia |
| UK | Bank of England |
| China | People’s Bank of China |
| Russia | Bank of Russia |
At the end of the article, you will find the complete list of the central banks of various countries of the world.
In this article you will learn what monetary policy is and how it’s used by the central banks to manage money supply in the country.
What is monetary policy?
Monetary policy is a set of actions used to control the amount of money available throughout the economy of a country in order to achieve a desired economic growth.
Monetary policy is used as a tool by the country’s central bank to control the money supply such as revising interest rates and changing bank reserve requirements.
Changes to monetary policy depend on various economic statistics such as a gross domestic product (GDP), rate of inflation, and growth rates of the economy.
Like fiscal policy of a country, monetary policy is also classified as either expansionary or contractionary depending on how it impacts the overall economy. It is used as a tool to increase or decrease liquidity to create economic growth.
Here are the three objective of a central bank;
- To manage inflation;
- To reduce unemployment after controlling inflation; and
- To promote moderate long term interest rates to manage money supply in a country.
Types of monetary policy
Depending on the present economic conditions of a country and the desired growth rate, the central bank makes changes to the monetary policy. Based on changes, the monetary policy is either contractionary or expansionary.
If prices of the goods and services in an economy rise by reducing the purchasing power of money and increasing inflation, then in order to control the money supply, the central bank of the country may prefer to increase the interest rates to slow down the growth and decrease inflation. This type of monetary policy is referred to as contractionary.
Increase in interest rates will ultimately increase lending rates of a bank. This will make loans expensive. It will reduce the money supply by restricting the volume of money banks can lend. Due to fewer business activities and lower borrowal, growth of the economy will slow down.
Contractionary monetary policy is used by the central bank to control high inflation and to reduce money circulation in the economy.
During an economic slowdown, or a recession, the central bank lowers interest rates in order to make saving less attractive and to increase consumer spending and borrowing to boost the economy. This type of monetary policy is referred to as expansionary. It reduces unemployment and stimulates economic activities due to higher money supply and attractive interest rates.
In addition to interest rates, the central bank may change the reserve requirements. It’s the fund that banks of the country must retain as a proportion to their deposits to make sure that they meet their liabilities.
Central bank may lower the reserve requirement to release more funds for the banks to offer loans and buy assets. Conversely, increase in reserve ratio curtails bank lending and slows down the growth.
To manage money supply, the central bank can either purchase or sell government securities. If the central bank decides to buy government securities, then banks will get more money to lend, which increases the money supply in the economy.
Monetary policy is used as a tool by the central banks to keep the overall economy stable with low inflation and unemployment.
Here is a list of central banks of different countries for your reference:
| Country | Central Banks |
|---|---|
| India | Reserve Bank of India |
| Austria | European Central bank |
| USA | Federal Reserve |
| Australia | Reserve Bank of Australia |
| UK | Bank of England |
| Argentina | Central Bank of Argentina |
| Switzerland | Swiss National Bank |
| Afghanistan | Bank of Afghanistan |
| South Africa | South African Reserve Bank |
| Iran | CentralBank of Islamic Rep. of Iran |
| Bangladesh | Central Bank of Bangladesh |
| Indonesia | Bank Indonesia |
| Azerbaijan | Central Bank of the Rep. of Azerbaijan |
| Iceland | Central Bank of Iceland |
| Hungary | Central Bank of Hungary |
| Guinea | Central Bank of the Rep. of Guinea |
| Greece | European Central Bank |
| Pakistan | State Bank of Pakistan |
| Vietnam | State Bank of Vietnam |
| Uzbekistan | Central Bank of the Rep. of Uzbekistan |
| UAE | Central Bank of United Arab Emirates |
| Turkey | Central Bank of Republic of Turkey |
| Thailand | Bank of Thailand |
| Tajikistan | National Bank of Tajikistan |
| Taiwan | Central Bank of the Rep. of China |
| Canada | Bank of Canada |
| Sweden | The Riksbank |
| Sri Lanka | Central Bank of Sri Lanka |
| China | People’s Bank of China |
| Chile | Central Bank of Chile |
| Chad | Commercial Bank Chad |
| Cambodia | National Bank of Cambodia |
| Brazil | Central Bank of Brazil |
| Bolivia | Central Bank of Bolivia |
| Bhutan | Royal Monetary Authority of Bhutan |
| Bermuda | Bermuda Monetary Authority |
| Spain | European Central Bank |
| South Korea | Bank of Korea |
| Slovenia | European Central Bank |
| Singapore | Monetary Authority of Singapore |
| Seychelles | Central Bank of Seychelles |
| Saudi arabia | Saudi Arabian Monetary Authority |
| Russia | Bank of Russia |
| Qatar | Qatar Central Bank |
| Philippines | BangkoSentral ng Pilipinas |
| Peru | Central Reserve Bank of Peru |
| Papua New Guinea | Bank of Papua New Guinea |
| New Zealand | Reserve Bank of NewZealand |
| Netherlands | European Central Bank |
| Myanmar | Central Bank of Myanmar |
| Korea | Republic Bank of Korea |
| Kenya | Central Bank of Kenya |
| Kazakhstan | National Bank of Kazakhstan |
| Jorda | Central Bank of Jordan |
| Japan | Bank of Japan |
| Italy | European Central Bank |
| Ireland | European Central Bank |
| Iraq | Central Bank of Iraq |
| Morocco | Bank of Morocco |
| Mongolia | Bank of Mongolia |
| Mexico | Bank of Mexico |
| Mauritius | Central Bank of Mauritius |
| Mali | Central Bank of West African States |
| Maldives | Maldives Monetary Authority |
| Malaysia | Bank Negara Malaysia |
| Libya | Central Bank of Libya |
| Ghana | Bank of Ghana |
| Germany | European central bank |
| Georgia | National Bank of Georgia |
| France | European Central Bank |
| Finland | European Central Bank |
| Fiji | Reserve Bank of Fiji |
| Egypt | Central Bank of Egypt |
| Denmark | National Bank of Denmark |
| Cyprus | European Central Bank |