Advantages and Disadvantages of Monetary Policy

Monetary policy pertains to how central banks around the world deal with their money supply and the performance of economies around the world. As an example, how the Federal Reserve in the United States handles their funds. This is when the central banks will use government securities, interest rates, and other requirements in order to affect how available money is in the economy and credit as well. As with any other policy, there are an array of advantages and disadvantages to take into consideration.

Low Inflation Rates

One of the largest advantages of monetary policy is that it helps to promote stable prices which are useful for ensuring that inflation rates stay low throughout the world. Inflation essentially impacts the way that you spend your money and how much your money is worth. With a low inflation rate, it allows you to make the best financial decisions in your life without having to worry about prices drastically increasing unexpectedly.

Future Conflictions

One of the most important disadvantages to take into consideration of monetary policy is that the goals that it may have now could possibly impact goals in the future. As an example, if monetary policy positively influences inflation rates today, it may spark inflation in the future. With that being said, there are steps that the policy can take in order to ensure that there is a balance between their long-term and short-term goals.

Political Freedom

Since central banks can operate separately from the pressure of the government, this allows them to make the best decisions based on how the economy is doing at a particular time. This means that the way that the banks operate is based on hard facts and data instead of the needs and wants of someone. Even the Federal Reserve in the United States (that is accountable to Congress) operates without being exposed to political influences.

Taking Time

Although in today’s day and age we expect things to be done immediately, monetary policy takes time. In comparison to other types of policies such as fiscal policies that help to push more money into the economy, monetary policy has to work through the economy, which can make it incredibly time consuming. According to The San Francisco Fed, changes that are made today may take 2 to 3 years before they begin to take place and make a change. It could possibly even take longer to make an impact to inflation.