monetary policy

● Monetary policy is just the control of the amount of Capital flowing around the domestic marketplace. This is different from fiscal policy where fiscal policy means what exactly is my government spending on and how much will it spend in the future? Monetary policy is the amount of money that is available in the economy for economic actors (governments or you and I) to utilize. One of the ways we can control the money supply is by printing the money but a more well-known technique the government can use that can either make it expensive or cheaper to borrow money is setting interest rates. Central bankers around the world like the Fed or the Federal Reserve can I adjust these interest rates to make it easier or harder to borrow money; higher interest rates encourage saving and lower interest rates encourage spending. This is what Central Banks or the Fed is doing when it's adjusting the interest rate and this behavior does not determine what individual private banks charge customers. It is, however, what the government's intentions are in regards to the economy. Governments ideally would like their central bankers to adjust the interest rates to manage the health of the local economy. So, if your country is in a recession, you can adjust the interest rate to come to act that recession; if the interest rate is high, is most likely consumers are not buying often. This will also create more jobs. This is why governments like to have control over their monetary policies.

● It is important to note, however, that monetary policy decisions are rarely isolated from outside influence and those policies are connected to a couple of important choices. Those decisions are what are your exchange rate policies and are you going to implement capital controls? Exchange rates are the cost of a policy related to another. So, historically and even now, the British pound has been more expensive than the US dollar on average at least because the pound is more valuable than the dollar. It's worth noting that $5 trillion dollars of foreign money is exchanged every day. That is a lot compared to the 20 to 25 trillion dollars of worldwide trade in goods and services.

● Now, the government can either fix their rate to a specific price to cover the economy from exchange rate risk (fluctuations on predicted movements in the value of the money) or the governments can allow it to float the value of the currency is dictated by international market forces or any central government. Now, why do one instead of the other? You would fix your rate because what do you get in return is insulation over your firms and investors in the global marketplace who could be buying foreign assets from exchange rate risks; because you can't always predict the value of a particular currency when the rate floats like stocks on Wall Street, it could be beneficial for you to keep your firms who buy or sell things in the global marketplace safe by fixing your rate. Now, when you fix your rate you have to maintain a specific price meaning you're giving away monetary policy autonomy or the notion that governments control the health of the domestic marketplace by setting the interest rate. Therefore, if you want to fix your exchange rate your in the international marketplace, your monetary policy will then be preoccupied with controlling the global supply of that currency. On the other hand, if you float the rate the firms, again, are bared to the exchange rate risk and this could be costly. Still, the monetary policy can now focus on the health of the local market where there's no concern about how many units of that currency are traded globally. In summary, you'd love to have monetary policy autonomy so you won't have to worry about the international marketplace but you also most likely would like to fix your exchange rate in another dimension because you don't want your international traders to stress from a dampened global trade and investment.

● Capital controls

● Governments cannot have a fixed exchange rate and monetary policy autonomy but they can have capital controls. Capital controlled are political restrictions like trade barriers known as tariffs where something is put in place to limit the flow of currency throughout your economy and you want to limit the flow of currency through your economy so you can have some idea of the amount of money that is flowing throughout your economy. You may even not want to be flooded with capital because you have to think about supply and demand. If there is an increase of capital in your economy, the value of that Capital will most likely go down which relates to a well-known topic known as inflation or depreciation and purchasing power.

● Presently, the problem is most countries do not limit their flow of currency because if you do you will limit how much goods and services and trade (foreign direct investment) there is to do globally. During the absence of capital control, states experience they trilemma also known as The impossible Trinity. State's preferences are monetary policy autonomy, fixed exchange rates and open Capital. The trilemma states they cannot have all three, you have to choose two of them.

● Note! Go to YouTube or Khan academy and learn about the trilemma

●

●

●

●