What are the different types of currency policy instruments?
The country's central bank, such as the Federal Reserve Bank in the United States, has the ability to use currency policy tools to help the nation to achieve the required economic position. These currency policy tools help promote production and employment and also try to keep prices stable in the economy to avert inflation. Changing the discount rate, changing the requirements for reserve and participation in free market operations is various currency policy tools available to the country's central bank. These loans, considered loans for discounts, can help banks to meet reserve requirements. They also maintain sufficient balance to cover the collection of depositors.
The discount rate change brings about two scenarios. When the central bank raises the discount rate, loans become more expensive. This may result in a reduction in the available money on the market for private consumers and investors. Reducing discount rates can stimulate banks to increase loans and thus lead to an increased opportunity forPrivate and commercial loans.
Reserve requirements equal to the amount of cash that the central bank requires for other banks to have at hand to cover withdrawals and unexpected outflows. Increasing the reserve requirements can take the amount of the money available to the bank. Reducing reserve requirements can allow banks to release credit policies and put more money into the hands of consumers, manufacturers and investors.
free market operations are the main tool used by the central bank to receive monetary policy. In the case of the United States, the Federal reserve system buys or sells government securities, usually an impact on the accounts for the treasury of money in the economy. When the federal reserve system invests in government securities, it orbits more funds through the economy through the banking system. However, if government securities are sold, less money circulateseconomy.
Not all countries fall under the same monetary policy model, although most developed countries are maintained by the Central Banking Office that implements similar policies. When monetary policy tools are used to increase money supply, the central bank seeks to encourage consumers and corporations to invest, spend and speed up economic growth. Reducing money supply can slow economic growth and help prevent inflation when the economy is close to ideal employment, production and price stability.