Monetary policy is also an important part of the country's macroeconomic policy, which also serves to promote stable economic development. It is a policy instrument by which the central bank uses the tools at its disposal, such as interest rates, exchange rates, credit, currency issuance and foreign exchange management, to regulate the relevant variables and ultimately influence the overall national economic activity. Like fiscal policy, monetary policy reflects the government's management of the national economy's financial resources, but this financial resource mainly refers to the financial resources represented by bank credit. In addition, monetary policy does not reflect the state's management of the distribution of a portion of social goods in the same way as fiscal policy. Therefore, monetary policy has both similarities and differences with fiscal policy.
1, Monetary policy objectives. The objective of monetary policy, also known as the ultimate goal of policy, refers to the ultimate goal of monetary policy regulation. The objectives of monetary policy have been developed over a long period of time, from the initial price stability to the four major objectives that are generally accepted by countries around the world today: price stability, full employment, moderate economic growth and balance of payments. As mentioned earlier, these four objectives are also the main elements of the objectives of fiscal policy. They have been explained earlier and will not be repeated here.
2, Intermediate objectives of monetary policy. Monetary policy is a kind of indirect regulation of economic performance. It cannot directly affect the actual economic activities, but must achieve its ultimate goal through certain intermediate objectives. Therefore, certain intermediate objectives must be selected as the direct regulation purpose of monetary policy, and these intermediate variables can also be used as indicators to reflect the effects of monetary policy operations. Intermediate targets are a very important transmission link in the whole process of monetary policy implementation.
The selection of intermediate targets for monetary policy must adhere to certain principles, i.e. a suitable intermediate target must be closely linked to the ultimate objective of monetary policy - national income stability, be under the control of the central bank, and be able to quickly serve as a declaration of monetary policy intentions. At present, the more influential intermediate targets proposed by countries include interest rates, money supply, total loans, the monetary base and stock prices, but only three are generally accepted: interest rates, money supply and total loans. These three indicators are widely used in the conduct of monetary policy because they reflect these principles and are well adapted to the economic and financial system. The interest rate is described in the next section, but here we will briefly discuss the money supply and total loans.
First, the money supply. The most fundamental objective of monetary policy can be attributed to providing a favorable monetary environment for a country's economic development. In modern credit-based conditions, changes in the money supply have a direct impact on aggregate social supply and aggregate social demand, as well as on the balance between the two, and thus on the functioning of the macroeconomy as a whole. Therefore, in order for the supply of money not to be a source of major economic fluctuations and not to disrupt the normal functioning of the national economy as a whole, monetary policy must be formulated in accordance with the aggregate social supply and demand situation. One of the important tasks of monetary policy is to maintain a moderate money supply, so that an excessive boom or a prolonged recession in the economy is not caused by too much or not enough money.
The so-called moderate money supply has both quantitative and qualitative requirements, which are mainly reflected in the following aspects: First, in the case of insufficient aggregate social demand. At this time, the entire social economy is in recession or depression, resources are idle, enterprises are underemployed and social and economic development is stagnant. At this time, the central bank's monetary policy should be expansionary, that is, to increase the money supply to stimulate the increase in aggregate demand, so as to promote the recovery and development of production and promote the total social supply and demand to balance.
The second is in the case of excess aggregate social demand. This is when the macro economy is in an overheated state, production is developing rapidly, investment is increasing sharply, market supply is insufficient, too much money is chasing too few goods and prices are rising. At this time, the central bank's monetary policy should be tight, i.e. to reduce the money supply, suppress aggregate social demand, promote moderate and stable economic growth, and promote a balance between aggregate social supply and demand.
Third, it is a situation where the composition of aggregate social supply and aggregate demand are incompatible. At this point, the macro economy is in a situation where some sectors are under-demanded, with a relative surplus of goods and stagnant production, while other sectors are over-demanded, with goods in short supply, prices rising and production developing rapidly. The result will be a disproportionate and distorted development of the economy as a whole. At this time, monetary policy should be tightened and loosened, combined with a combination of loosening and tightening, through the adjustment of the composition and flow of money supply, to change the situation that the composition of total social demand does not match the composition of total supply, so as to promote the balance of total supply and demand not only in terms of quantity but also in terms of structure, to ensure the coordinated development of the national economy.
Secondly, the total scale of loans and credit policy. The total scale of loans and the total amount of loans is the total amount of funds lent by banks to the society by way of credit in a certain period of time. It has an objective quantitative relationship with the rate of economic development. A moderate total loan size can both promote the development of economic construction and contribute to the stability of the currency. Therefore, controlling the total size of loans has traditionally been the intermediate objective of the central bank in implementing monetary policy.
There are two main approaches to the regulation of the total scale of loans: one is to set a maximum loan limit and directly control the total scale of loans. Under the planning system, this practice is more common, i.e. according to the national economic growth demand for money, the central bank unified preparation of credit plans, and then issued to the specialized banks. The total size of national loans and the loan limits of specialized banks are directive plans that must be strictly enforced and not breached. The control of lending limits allowed for the quickest and widest credit tightening and expansion, but was too rigidly regulated and not flexible enough.
Secondly, bank refinancing affects the ability of the entire banking system to generate derived deposits, indirectly achieving the objective of aggregate control. The bank's use of base money to refinance various financial institutions is an important tool in its regulation of aggregate lending, and it will affect the size of the loans formed in the operation of each financial institution.
