– Current Blog Posts: Monetary Policy

In a previous note we developed and discussed the importance of AD changes in determining short-run economic performance. Any country’s economy is continually buffeted by shocks to AD and AS. AD shocks come from spenders – those societal groups that change their desires for buying a nation’s goods and services – households, firms, governments, and foreign buyers. These groups change their spending requirements because other causal variables change and impact them. Consumer confidence, real interest rates, exchange rates, economic changes abroad, and many other factors may cause AD to be higher or lower in any given year.

 

These changes in AD often persist and become the subject of policy. Should government 4intervene into the economy and attempt to bring AD back to a more normal and sustainable level or growth pattern? If so, what type of policy should be used? Monetary and fiscal policies are often used to stabilize AD changes. AS policies are sometimes used as well, and those and fiscal policy are discussed in separate notes.

 

The most active and most written about type of AD policy for almost any country is monetary policy. Monetary policy is at the same time very simple and very complex. It is also considered to be mysterious since deliberations are not always perfectly transparent and information is often slow to be announced or published. Monetary policy has its own jargon and therefore requires its own study of terminology.