What are monetary policies?
Monetary policies, also called fiscal policies are strategies and regulatory policies enacted and published by a country’s central bank to manage the circulation of money in its economy. It is used to determine a nation’s economic worth and to achieve long-term economic growth.
What are the reasons for monetary policies?
There are reasons why monetary policies/fiscal policies are made by a country’s central bank. These reasons are based on the economic goal of the country in question. The Bank of Canada for instance has a goal to maintain inflation at 2% as they believe that low and stable inflation has a contributory effect on economic growth. The United States Federal Reserve monetary policy aims to promote maximum employment, stabilize prices, and moderate long-term interest rates.
However, on a general note, the following are common reasons for monetary policies;
• To keep inflation, employment, and economic growth stable
• To regulate interest rates although the high or low-interest rates could discourage investment and depression of asset prices
• During an economic recession where there are low-interest rates, the monetary policies could determine if liquidity and money should be added for circulation
• Helps to position investors to take advantage of changes in interest rates and other measures.
Impact of monetary policies on foreign direct investments
The impact of monetary policy on foreign direct investments can be double-edged depending on the nature of the policies. There are accommodative and tight monetary policies.
Accommodative monetary policies could be set in when the economy is very slow and policies that could lower the interest rate could be set in to stimulate growth
A tight monetary policy could be adopted when the economic growth spurs the inflation rate, policies to raise short-term interest rates could be set in.
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