Types of monetary policy. Importance of regulating monetary policy

Types of monetary policy. Importance of regulating monetary policy.
Introduction

World experience shows that monetary policy plays an important role in achieving economic growth, as well as in ensuring macroeconomic and financial stability. Ensuring price stability, monetary policy creates conditions conducive to economic growth, strengthening macroeconomic and financial stability in the country.

Objectively, it should be recognized that today, in practice, not all the potential of monetary policy and banking regulation is used, the underdevelopment of transmission mechanisms that ensure the proper operation and effectiveness of monetary instruments complicates the achievement of goals.

Improving monetary policy helps to ensure the stability of the national currency, a low and stable level of inflation and interest rates, and thereby contributes to increased stability of macroeconomic growth.

The purpose of essay is to develop scientific proposals and practical recommendations for improving monetary policy and increasing its role in ensuring economic growth.

The role of monetary policy in ensuring economic growth

Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

There are two types of monetary policy: contractionary and expansionary. Central banks use contractionary monetary policy to reduce inflation. They reduce the money supply by restricting the volume of money banks can lend. The banks charge a higher interest rate, making loans more expensive. Fewer businesses and individuals borrow, slowing growth.

Central banks use expansionary monetary policy to lower unemployment and avoid recession. They increase liquidity by giving banks more money to lend. Banks lower interest rates, making loans cheaper. Businesses borrow more to buy equipment, hire employees, and expand their operations. Individuals borrow more to buy more homes, cars, and appliances. That increases demand and spurs economic growth.

Maintaining price stability is the key to macroeconomic and social stability in the country and a prerequisite for promoting economic reforms and the success of the country's socio-economic development programs.

Low and stable inflation is the most important condition for ensuring balanced economic growth, increasing the competitiveness of production and the standard of living of the population. Therefore, the reduction and stabilization of price growth should be one of the important priorities of state economic policy.

Three Objectives of Monetary Policy

Central banks have three monetary policy objectives. The most important is to manage inflation. The secondary objective is to reduce unemployment, but only after controlling inflation. The third objective is to promote moderate long-term interest rates.

For example, the U.S. Federal Reserve, like many other central banks, has specific targets for these objectives. It wants the core inflation rate to be around 2%¹. Beyond that, it prefers a natural rate of unemployment of between 3.5% and 4.5%.

In theory, there are many dynamic models of economic development, but the task of economists is to choose certain tools that contribute to achieving economic growth, taking into account the specifics of a particular state.

All central banks have three tools of monetary policy in common. First, they all use open market operations. They buy and sell government bonds and other securities from member banks. This action changes the reserve amount the banks have on hand. A higher reserve means banks can lend less. That's a contractionary policy. In the United States, the Fed sells Treasurys to member banks.

The second tool is the reserve requirement, in which the central banks tell their members how much money they must keep on reserve each night. Not everyone needs all their money each day, so it is safe for the banks to lend most of it out. That way, they have enough cash on hand to meet most demands for redemption. Previously, this reserve requirement has been 10%. However, effective March 26, 2020, the Fed has reduced the reserve requirement to zero².

When a central bank wants to restrict liquidity, it raises the reserve requirement. That gives banks less money to lend. When it wants to expand liquidity, it lowers the requirement. That gives members banks more money to lend. Central banks rarely change the reserve requirement because it requires a lot of paperwork for the members.

The third tool is the discount rate. That's how much a central bank charges members to borrow funds from its discount window. It raises the discount rate to discourage banks from borrowing. That action reduces liquidity and slows the economy. By lowering the discount rate, it encourages borrowing. That increases liquidity and boosts growth.

In the United States, the Federal Open Market Committee sets the discount rate a half-point higher than the fed funds rate. The Fed prefers banks to borrow from each other.

At the same time, a consistently low inflation rate stimulates economic development by creating the necessary conditions for transforming the savings of the population and legal entities into long-term investments, as well as ensuring the most efficient distribution of available economic resources due to leveling the effect of price distortions on the market.

The most common methods of monetary policy used by most central banks of developed and developing countries are inflation targeting, monetary targeting, currency rate targeting, a regime without a nominal anchor, etc. Although the ultimate goal is to achieve target level or range of inflation, these methods differ mainly depending on the use of operational and intermediate goals. This method of implementing monetary policy implies achieving price stability by controlling changes in monetary aggregates, reserve money and money supply.

The successful implementation of this strategy is determined by the presence of a stable relationship between inflation and monetary aggregates. At the same time, inflation goals are achieved by maintaining the volume of monetary aggregates at the appropriate target level.

Table 1.

Monetary policy regimes used in international practice

№	Name of methods	Priority Goals
1	Monetary targeting	It implies achieving price stability by controlling changes in monetary aggregates, reserve money and money supply
2	Exchange Rate Targeting	Linking the exchange rate of the national currency to the currency of developed countries, as a rule, with a low and stable inflation rate
3	Mode without a nominal anchor	It implies a refusal by the central banks to accept any obligations to achieve the target values of nominal indicators, while long-term goals are proclaimed (stable economic growth, high employment, low inflation) with intermediate guidelines that are not officially published
4	Inflation targeting	It is a monetary policy regime in which the central bank announces a medium-term target for inflation and focuses all its efforts on bringing current inflation to its target through the use of monetary instruments

Current state of monetary policy of the CB of Uzbekistan and its role in ensuring economic growth.

The Central Bank of Uzbekistan from January 1, 2020 began a phased transition to inflation targeting. The benchmark for reducing inflation by 2021 will be 10%, by 2023 - 5%, follows from a presidential decree of November 19 “On improving monetary policy with a phased transition to the inflation targeting regime.”

The main principles of the monetary policy of the Central Bank are defined:

the establishment of a permanent inflation target, bringing it to the general public;

the use of a wide range of monetary policy instruments for regulating interest rates in the money market and managing inflationary processes;

conducting a detailed macroeconomic analysis and forecasting taking into account the available information in the domestic and foreign markets for making objective decisions in the field of monetary policy;

improving the Central Bank's communication policy to explain to the general public the objectives of monetary policy, ensuring a predictable macroeconomic situation and building confidence among market participants.

The main tool for inflation targeting is the interest rate, which allows you to give appropriate signals to the economy about the money supply (amount of money). If the interest rate rises, then the interest on loans (consumer, mortgage, for entrepreneurship) rises. In this situation, as a rule, the population postpones consumption, which leads to a decrease in demand, and in the future - inflation. But this, in turn, slows down economic growth. If the rate goes down, money supply rises, production rises to a potential level.

A necessary element of inflation targeting is a floating exchange rate, in the absence of which the money supply is not controlled by the interest rate.

The Central Bank, together with the government, is taking all possible measures to curb inflation.

In particular, these are:

- ensuring credit growth in accordance with the pace of economic growth;

- ensuring the balance of the state budget;

- maintaining the mood to save the means and values of savings in society by ensuring that interest rates comply with market principles;

- Particular attention is paid to reducing the dollarization of the economy.

A number of prerequisites explains the choice of inflation targeting regime in the conditions of Uzbekistan.

Firstly, today inflation targeting has established itself as the most effective monetary policy regime that best meets the set goals of effectively ensuring price stability in the medium term.

Secondly, the experience of using alternative currency or monetary targeting modes indicates that they do not comply with modern requirements and realities of Uzbekistan. Also, exchange rate targeting limits the ability to automatically smooth external shocks by adjusting the exchange rate.

As international experience shows, the transition to inflation targeting requires certain macroeconomic conditions and the implementation of a package of measures aimed at:

- increase the efficiency of the gear transmission mechanism of monetary policy;

- further liberalization and improvement of the foreign exchange market;

- improving existing and introducing modern market-based monetary policy instruments;

- capacity building in the field of analysis and macroeconomic forecasts;

- increasing the transparency and predictability of the current monetary policy in order to inform the general public about the tools used and the ultimate goals of the policy;

- improvement of communication policy;

- development of the institutional base of the Central Bank;

- development of financial markets, including the government securities market;

- effective coordination of macroeconomic policies;

- successful implementation of structural reforms in all sectors

economics.

Conclusion

To summarize the review of the use of the influence of monetary policy, we can conclude the following: monetary credit policy is an important sector of the state economic policy. A study of the features and effectiveness of monetary policy regimes, taking into account the specifics of the national economy, shows that achieving and maintaining stability in the medium term as a priority goal of the Central Bank is most consistent with the inflation targeting regime. On this basis, the legal foundations and basic economic prerequisites were laid for a gradual reorientation of the principles and methods of implementing monetary inflation targeting policies.

In particular, measures taken to liberalize monetary policy and create market conditions for the formation of the exchange rate, a clear definition of the priority goals and practical independence of the Central Bank, the transition to the active phase of the implementation of monetary policy, improving the methodology for calculating and evaluating inflation, as well as increasing transparency and strengthening communication policy at the initial stage create the basic conditions for the transition to inflation targeting.

In general, the transition to inflation targeting requires a radical review and improvement of all the main aspects of the monetary sphere, which will mark a qualitatively new level of ensuring macroeconomic stability as the basis for sustainable economic growth in the long term.

1^ https://www.federalreserve.gov/faqs/money_12848.htm

2^ https://www.federalreserve.gov/monetarypolicy/reservereq.htm