Besides the importance of shaping monetary policy, implementation is also crucial. For developing countries especially, these monetary policies are important and it is also important to implement them during suitable times of economic activity.

Open market operations are one way through which the monetary institutions buy and sell short term bonds on the open market by the usage of newly created bank reserves it is seen that traditionally, these open market operations target short term interest rates which are called federal funds rates. Through selling and buying of assets, the central bank adds or removes money from the banking system and banks respond by loaning the money more easily at a lower rate until the target is not met by central banks.

Secondly, the reserve requirements which refer to the funds that bank must keep as a part of the deposits which are made by their customers in order to service their liabilities. Lowering this reserve requirement means releasing more capital for the banks to offer either more loans or to buy other assets. Increment in the reserve requirement has also a reverse effect in which bank lending is restricted, eventually slowing down the supply of money.

Leave a Reply

Your email address will not be published. Required fields are marked *

X
%d bloggers like this: