Question

what are the components of the monetary policy and which one is most efficient?   

Answer 1

Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the monetary base, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. Or we can say that Monetary policy is how central banks manage liquidity to create economic growth. Liquidity is how much there is in the money supply. That includes credit, cash, checks and money market mutual funds. The most important of these is credit. It includes loans, bonds and mortgages.

The instruments of monetary policy are of two types: quantitative and qualitative. They affect the level of aggregate demand through the supply of money, cost of money and availability of credit.

components of Monetary Policy

Bank rate (discount rate) rate charged by the FED to other banks to pull out money; an interest rate

Open market operations Buying & selling government securities to change the supply of money

Reserve requirements sets how banks must hold reserves (not lend out); amount of funds that the bank must have on hand each night

There's monetary policy, but there's also credit policy. Credit policy was really what the Federal Reserve was founded on top of. Credit policy is about providing liquidity to a financial system that suddenly finds itself short of liquidity. It can happen when a financial system is under great stress, perhaps even a panic sets in and people try to sell assets in huge volumes. When they do this, they'll find that there aren't always enough buyers; liquidity in the system starts to dry up. And its important for a central bank like the Federal Reserve to be able to provide that liquidity, to act as, an economist would say, as the lender of last resort. And so the Federal Reserve has a discount window, where we provide loans to financial institutions and others during periods of these sorts of stresses.

Credit policy is about keeping the conduits of finance open and running efficiently, while monetary policy is really about striking a balance between the amount of money there is in circulation and the trade needs of the economy. Monetary policy as we think about it today is a relatively new function of the Federal Reserve System. It's a function that was added in the mid-1930s.