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Sunday, March 15, 2009

Results in open market activity

The policy enacted by a central bank in order to control money supply in their domestic economy. Monetary policy can take many different forms, but the common denominator almost always results in open market activity that affects interest rates and currency valuations for a given economy.

Central banks will enact varying monetary policy in order to control price stability and economic growth. For some countries, central bank officials are required to enact policy that keeps domestic inflation within given ranges, while others operate more freely on a more de facto basis.
As an example, a central bank may choose to limit monetary supply if it feels that inflation is a threat to price and economic growth stability. In order to do so, it will attempt to raise interest rate levels by changing its own lending rates and/or affecting monetary supply in the broader market.

Though a full discussion of different monetary policy regimes is beyond the scope of this definition, it is important to know and appreciate the distinctions between global central banks and their distinct methods to control price and growth stability.

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