Monetary policy: control the money supply to control inflation and combat the economic recession

0203 2016

Monetary policy is the policy pursued by central banks around the world, in order to control the amount of money supply, in order to achieve economic stability, maintain the exchange rate stability and cohesion of prices, and control interest rates, to be able through it to control inflation, or to spare the economy has entered stagnant or shrinking.

And the stability of the economy can achieve other economic goals, including the fight against unemployment, and to maintain the level in stable prices and a fixed exchange rate of the national currency, and to make interest matching the prices with the economic situation of the country; In this sense and for the purpose of controlling the money supply, apply many of the actions of central banks to achieve the desired economic goals of the aforementioned, and between those procedures, for example, but not limited to, the interest rate adjustment, the purchase or sale of government bonds, changing the statutory reserve ratio for commercial banks.

Monetary policy definition

Monetary policy is defined as a set of rules, tools and methods, procedures and measures used by central banks in order to control liquidity in the money supply in the financial sector size, so check out which set of objectives, including cohesion prices and the stability of the national currency exchange rate.

It defined and can also process or procedure by which central banks seek to influence and control the quantity of money in the economy to achieve certain objectives of macroeconomic (such as a certain economic growth, or target a specific inflation or access to a particular exchange rate, etc. ..).

The functions of monetary policy:

- Control the size of the money supply, interest rates, to control inflation levels and combat the economic recession.

- Maintaining the stability of the exchange rate of the national currency appropriate to put the national economy prices, so that it contributes significantly to the achievement of economic stability.

Types and instruments of monetary policy

Expansionary monetary policy

Is the policy that is followed by the central bank in the event of economic downturns or recessions, which summed up its steps by the central bank, cut interest rates (reducing the cost of lending) in order to increase borrowing and money supply in the market, leading to an increase in money supply in the market, and rising demand for goods and services, and this is followed by a rise in demand for loans for investment, which in turn leads to economic growth.

Contractionary monetary policy

Central bank monetary policy deflationary followed in the case of high price level (inflation), where under this policy, to reduce the money supply and the reduction of loans, by raising interest rates, leading to a decline in aggregate demand and spending on goods and services, which in turn leads to lower commodity prices and achieve the desired objective behind such a policy, which is economic stability.

The process of monetary policy applications

Played monetary policy, an important and vital role during the global financial crisis that befell the world in 2008, with most central banks have followed the global monetary policies, aimed at enhancing liquidity in the economic system and increasing the money supply, in order to avoid the global economy enter a recession or recession, and for this purpose, most banks have taken the initiative in the world, to cut interest rates in order to increase borrowing and money supply in the market, resulting in higher demand for loans for investment, and remained interest rates since that date until now extremely low and in many cases close from scratch in most countries of the world, particularly directly affected by the effects of the crisis, in order to stimulate economic growth.

Monetary policy tools

Central banks use different tools to reach the desired monetary policy, including:

First: - quantitative tools (conventional)

(1) re-discount rate

In order to strengthen their liquidity, the commercial banks to re commercial papers in its possession discount at the Central Bank in exchange for a certain percentage of interest from those commercial paper rates, the central bank in exchange for providing loans to commercial banks to be used for the expansion of bank credit granted to the private sector.

(2) foreign exchange swap operations

It is an agreement for the exchange of a loan of a particular currency for the purpose of influencing exchange rates in the local currency.

(3) legal reserve

Is the proportion of deposits that commercial banks must keep with the central bank in the form of a statutory reserve. In times of inflation, the central bank raised the proportion is even lower the legal reserve liquidity of commercial banks, and thus decreases their ability to lend. In the case of economic recession, the Central Bank to reduce this ratio and thus increase commercial banks' ability to lend.

(4) Liquidity Reserve

Is the percentage of assets that the commercial bank should be kept and can be converted to cash in the short term, the central bank can raise this ratio when necessary.

(5) open market operations

Are processes under which enters the central bank in the financial market to buy the securities put in place of the amount of the cash in the case of the expansionist policy. On the contrary, in the case of deflationary policy as the central bank entered the market salesman Securities and pull instead of the amount of money to decrease the size of the money supply in circulation.

Second: - quality tools

Monetary authorities can use a range of tools how (quality) to apply the necessary monetary policy is appropriate to achieve the total assessed that the economic policy objectives, for example:

(1) regulation of credit:

Can the monetary authorities in the event of deflationary policy that sets the bar for loans could be granted. It can also monetary authorities are also direct loans to certain sectors where the ceilings loans or where the ceilings put in place to raise the interest rate, which encourages investors to apply for loans and investment in those sectors.

(2) selective credit policy

Can cap the borrowed amounts or the number of borrowers or specify a period to repay the loan, all the means to limit the distribution of loans in certain sectors, can also limit the granting of loans in specific sectors of the investment is not in line with the approved economic policy application.

Monetary policy objectives

Central banks use monetary policy to achieve some of the goals, including the following:

- The achievement of certain levels of liquidity in the economy, by controlling the size of the money supply in the market.

- Contribute to the economic growth rates suitable in various economic sectors Pmaahakq increase the size of the national income and GDP growth.

- Achieving economic stability and push forward the production to increase the size of the money supply in the market in the case of economic recession.

- Contribute to reduce the effects of inflation in the economy, by reducing the amount of money in the market.

- To stabilize the price level in the way that serves economic growth.

- Contribute to increase the speed and pace of economic development by providing a suitable environment for the implementation of projects and programs of economic and social development.

Monetary policy of the Kingdom of Saudi Arabia

Follow the Saudi Arabian Monetary Agency (SAMA) a monetary policy aimed at stabilizing the exchange rate and to provide the necessary liquidity to meet domestic demand for credit needs, and by taking a package of tools to enhance the liquidity situation, in order to ensure the continuity of banking performance financing role in the economic development in the Kingdom .

The most important of these tools:

Reserves are mandatory to ensure liquidity and savings, return repo rate (repo), and the rate of return reverse repo agreements (reverse repo) so as one of the windows that serve the existence of economies of liquidity or strengthened; in addition to the above devices may be enhancing the status of liquidity in the banking system through Create deposits with local banks for relatively long periods on behalf of governmental bodies and institutions, as the institution issued to allow investment and deepen the debt market areas permissions, and the institution engaged in barter transactions of foreign exchange when the need arises to maintain the market needs of currency stability.

As a result of the flexibility enjoyed by monetary policy, it has succeeded in enabling a number of the world's economies to avoid the direct effects of the consequences of the global financial crisis that befell the world in 2008, including Saudi Arabia, which contributed to the precautionary measures taken in advance to avoid the direct effects of the global crisis.

Some believe ...

That monetary policy is rigid and inflexible, as used tools, procedures and measures fixed specific and particular is subject to change to address the economic conditions experienced by any country in the world, and the reality and the truth otherwise completely, given that monetary policy is very flexible policy and has many of the tools you use in certain economic conditions to control the size of the money supply, and thus the impact on economic activity in a country, for example, monetary policy using the right tool that fit with the need to maintain fixed exchange rates, in order to achieve stability in the general level of prices. And the effectiveness of monetary policy depends, largely on the extent of flexibility in the type of instrument used to achieve the desired objective, which may be the economy out of a recession or a possible spare the economy entering into a case of inflation.

2016 Al-Riyadh newspaper