UK Monetary Policy Regime Essay Example | Topics and Well Written Essays - 2500 words

UK Monetary Policy Regime - Essay Example This paper illustrates that Monetary Policy can be broadly defined as â€Å"the deliberate effort by the Central Bank to influence economic activity by variations in the money supply, in the availability of credit or in the interest rates consistent with the specific national objectives.†Ã‚   Money serves as a medium of exchange, as a store of value, a standard for measuring values and a unit of account. The role of money is to serve as a medium of exchange, and it is the medium through which everything can be bought and sold. The monetary policy of any country refers to the regulatory policy, whereby the monetary authority maintains its control over the supply of money for the realization of general economic objectives. This involves manipulating the supply of money, the level, and structure of interest rates and other conditions affecting the availability of credit. However, in the context of developing economies, monetary policy acquires a wider role and it has to be design ed to meet the particular requirements of the economy. This involves not merely the restriction of credit expansion to curb inflation, but also the provision of adequate funds to meet the legitimate requirements of industry and trade and curbing the use of credit for unproductive and speculative purposes. The monetary policy of an economy operates through three important instruments, viz. the regulation of money supply, control over aggregate credit and the interest rate policy. Economic growth is dependent on mobilizing savings and directing them into productive channels. In this process, money supply can only play a limited role. However, the role establishes an important connection between money supply, output and price level (ICFAI Center for Management Research (ICMR)). These relationships cannot be ignored even if the primary concern of the government is the mobilization of real factors that ultimately lead to economic growth. A principal objective of any central bank is to sa feguard the value of the currency in terms of what it will purchase. Rising prices – inflation – reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth.