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It is necessary to start from the explanation of the term itself. So what does the monetary policy mean? This is the control money supply and interest levels by a central bank. This may be, for instance, the Federal Reserve Board in the U.S. This policy is effective in order to regulate inflation and stabilize the currency. This policy is being one of the two methods the government can influence the economy. The Federal Reserve can affect the amount of money that is spent by consumers and businesses by influencing the effective cost of money.
There are some other related terms that are used along with the monetary policy. These are being the tight monetary policy (i.e., a central bank policy developed to curb inflation by increasing the reserves of commercial banks), easy monetary policy (i.e., a central bank policy designed to stimulate economic growth by lowering short term interest levels), and fiscal policy (i.e., decisions by the President and Congress, usually relating to taxation and government spending, with the goals of full employment).
So monetary policy is actually being the process that a government or central bank used to regulate the supply of money, availability of money, and also, cost o money. Monetary policy is addressed as being an expansionary policy or a contractionary policy, where an expansionary policy enhances the total supply of money in the economy, and a contractionary policy decreases the total money supply. Besides, monetary policy is contrasted with a fiscal policy that refers to government borrowing, spending, and taxation.
It is essential to mention that there are few monetary policy tools available to reach these ends: enhancing interest rates by fiat; reducing the monetary base, and also increasing the monetary base. All have an impact on contracting the money supply and expand the money supply as well.
Generally, all types of monetary policy include modifying the amount of base currency (M0) in circulation. This process of shifting the liquidity of base currency via the open sales and purchases of debt and credit tools is called open market operations. The difference between the various kinds of monetary policy is being first of all in the set of tools and target variables that are applied by the monetary authority in order to reach their goals.
