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Monetary policy
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{{Short description|Policy of interest rates or money supply}} {{Public finance}} {{Macroeconomics sidebar}} '''Monetary policy''' is the policy adopted by the [[monetary authority]] of a nation to affect monetary and other financial conditions to accomplish broader objectives like high [[employment]] and [[price stability]] (normally interpreted as a low and stable rate of [[inflation]]).<ref name=palgrave/><ref>{{cite web |title=Federal Reserve Board - Monetary Policy: What Are Its Goals? How Does It Work? |url=https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm |website=Board of Governors of the Federal Reserve System |access-date=15 August 2023 |language=en |date=July 29, 2021}}</ref> Further purposes of a monetary policy may be to contribute to [[economic stability]] or to maintain predictable [[exchange rates]] with other [[currencies]]. Today most central banks in developed countries conduct their monetary policy within an [[inflation targeting]] framework,<ref>{{cite web |url=http://www.imf.org/external/pubs/ft/fandd/basics/target.htm |title=Inflation Targeting: Holding the Line |last=Jahan |first=Sarwat |publisher=International Monetary Funds, Finance & Development |access-date=28 December 2014}}</ref> whereas the monetary policies of most developing countries' central banks target some kind of a [[fixed exchange rate system]]. A third monetary policy strategy, targeting the [[money supply]], was widely followed during the 1980s, but has diminished in popularity since then, though it is still the official strategy in a number of [[emerging economies]]. The tools of monetary policy vary from central bank to central bank, depending on the country's stage of development, institutional structure, tradition and political system. Interest-rate targeting is generally the primary tool, being obtained either directly via administratively changing the central bank's own interest rates or indirectly via [[open market operations]]. Interest rates affect general economic activity and consequently employment and inflation via a number of different channels, known collectively as the [[monetary transmission mechanism]], and are also an important determinant of the exchange rate. Other policy tools include communication strategies like [[forward guidance]] and in some countries the setting of [[reserve requirements]]. Monetary policy is often referred to as being either '''expansionary''' (stimulating economic activity and consequently employment and inflation) or '''contractionary''' (dampening economic activity, hence decreasing employment and inflation). Monetary policy affects the economy through [[financial]] channels like interest rates, exchange rates and prices of [[financial assets]]. This is in contrast to [[fiscal policy]], which relies on changes in [[tax]]ation and [[government spending]] as methods for a government to manage business cycle phenomena such as [[recession]]s.<ref name="ben">{{cite book |doi=10.1016/B0-08-043076-7/02257-9 |chapter=Monetary Policy |title=International Encyclopedia of the Social & Behavioral Sciences |pages=9976β9984 |year=2001 |last1=Friedman |first1=B.M. |isbn=9780080430768 }}</ref> In [[developed economy|developed countries]], monetary policy is generally formed separately from fiscal policy, modern central banks in developed economies being [[central bank independence|independent]] of direct government control and directives.<ref>{{cite web |last1=Independence |first1=International Symposium on Central Bank |last2=Adrian |first2=Stockholm Tobias |last3=Counsellor |first3=IMF Financial |last4=Monetary |first4=Director of the |last5=Department |first5=Capital Markets |title=Central Bank Independence and the Development of Payments and CBDCs |url=https://www.imf.org/en/News/Articles/2023/01/10/sp-central-bank-independence-development-payments-and-cbdc |website=IMF |access-date=15 August 2023 |language=en}}</ref> How best to conduct monetary policy is an active and debated research area, drawing on fields like [[monetary economics]] as well as other subfields within [[macroeconomics]].
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