Monetary Policy

Concept
Monetary policy is a type of economic policy that controls the amount of
money in circulation, interest rates, and credit of a country, through a
monetary authority.
The authority responsible for this control is the Central Bank, which seeks balance.
changing the money supply and determining interest rates, stimulating or reducing the
economy.
The money supply occurs from the liquidity of assets, that is, where goods and services
They are offered and exchanged for money, being always greater when the economy is
healthier.
In times of GDP growth, an economy has greater liquidity and in moments
the recession is smaller, therefore, the government controls the money supply seeking
the balance between these different scenarios. That is why it uses expansionary policies.
and contractionists.

Types of monetary policies

Expansionary monetary policy
In expansionary monetary policy, the Central Bank increases the money supply in the country.
and lowers interest rates with the aim of growing the economy and expanding consumption.
When this is done, the demand for goods and services increases and with interest rates
lower rates, companies take on more loans to meet demand. If the
the offer is not fully met, there is an increase in prices, that is, an increase in inflation.
The expansionist policy has the advantage of economic growth, however, the
disadvantage of keeping the country subject to inflation.

Contractionary monetary policy

The contractionary monetary policy is conducted when the opposite happens, that is, the
decrease in GDP and consumption within an economy.
The Central Bank raises interest rates, reducing the money supply within the economic flow.
and with that, the reduction of inflation due to the decrease in demand.

Fiscal policy and exchange rate policy

Monetary policy together with fiscal and exchange policies are formed within
of the set of economic policies of a country.
Based on these control policies called the 'macroeconomic tripod' that brings them together and
they form three goals known as:
Inflation targets: related to monetary policies and interest rate control;
Floating exchange rate: exchange rate policy that keeps exchange rates free in the market;
Fiscal target: goals of fiscal policy to keep public debt under control.
Instruments of Monetary Policy
They are instruments used by the Central Bank with the responsibility of conducting the
monetary policy.
The instruments of monetary policy are seen as a set of actions that
economic authorities use to control the money supply and interest rates.
It is up to the Central Bank:

➢ Issue coins,
➢ To be the guardian of bank reserves,
➢ Promote liquidity loans to commercial banks,
➢ Conduct open market operations and;
➢ To make selective credit control.
The instruments of Monetary Policy are:
➢ Compulsory collection
➢ Bank rediscount
➢ Operations with public bonds
➢ Credit control and selection
➢ Moral persuasion
Compulsory Collection
Compulsory collection is one of the instruments of Monetary Policy used by
Government to stimulate the economy. It is a mandatory deposit made by banks.
commercials with the Central Bank.
Part of all deposits made in cash by the population to the banks
commercial banks go to the Central Bank. The Central Bank sets this collection rate.
This rate is variable, depending on the government's interest in accelerating or not the
economy.
The compulsory withdrawal aims to increase or decrease the circulation of
currency in the country. When the government needs to reduce the circulation of coins in the country, the
Central Bank raises the reserve requirement, as this way commercial banks
there will be less credit available for the population, therefore, the economy ends up shrinking.
The opposite occurs when the government needs to increase the circulation of money in the country.
The compulsory rate decreases, and with that, commercial banks make a deposit.
smaller next to the Central Bank. In this way, commercial banks end up with more
available currency, consequently increasing their lines of credit. With more
money in circulation leads to increased consumption and the economy tends to grow.
Commercial banks can make voluntary transfers, however, the deposit
compulsory is mandatory.
Bank Rediscount
Another instrument of monetary control is the Bank Rediscount, in which the Bank
Central grants "loans" to commercial banks at rates above those practiced in
market.
The so-called liquidity assistance loans are used by banks.
commercial only when there is a cash shortfall (cash flow), that is,
when the demand for deposited resources does not meet its needs.
When the Central Bank's intention is to inject money into the market, it lowers the rate.
of interest to encourage commercial banks to take these loans. The banks
commercials, in turn, will have more credit availability to offer to the market,
consequently the economy heats up.
And when the Central Bank needs to withdraw money from the market, the rates of
the interest rates granted for these loans are high, discouraging banks
you start to catch them. In this way, the commercial banks that need to comply with
your immediate needs, tighten credit lines, providing less
credit to the market, which slows down the economy.
Operations with Public Bonds
Also known as Open Market, operations with securities
public is yet another instrument available in Monetary Policy. This instrument,
considered one of the most effective, it can balance the supply of money and regulate the
short-term interest rate.
The buying and selling of public securities is done through the Central Bank. According to the
the need to expand or retain the circulation of market currencies, the authorities
competent monetary authorities redeem or sell these securities.

If there is a need to lower interest rates and increase the circulation of money,
The Central Bank buys (redeems) government bonds that are in circulation.
If the need is reversed, that is, to increase the interest rate and decrease circulation.
of coins, the Central Bank sells (offers) the available securities.
Therefore, public securities are considered fixed income assets, making them a good
investment option for society.
Another purpose of public bonds is to raise funds for financing the
public debt, as well as financing activities of the Federal Government, such as.
Education, Health, and Infrastructure.

Credit Control
It is one of the most difficult instruments to define and present, as it is little used.
due to the constant changes it undergoes, as the rules set by the Bank
Central today may undergo changes or may even not exist tomorrow.
It is a tool that refers to direct control over credit. It may be related to
to the volume of credit transactions, to the term, or even to what this credit is intended for.

It is through this additional instrument of Monetary Policy that the monetary authorities
they have the ability to control the volume of credit and the distribution of credit lines, imposing
rates, conditions, and periods.
It eventually becomes an unconventional instrument, as it can generate distortions in
free functioning of the market and even discourage the activity of intermediation
financial, but sometimes it is used by the Central Bank according to the needs
required by the economic market.
Moral Persuasion
Central banks have the function of supervising the banking and financial system,
influence the settlement and payment systems, mainly as
providers of a variety of settlement and payment services for others
banks. These services must be reliable to be available even when
the markets in which they operate are in crisis. They should never be
the origin of such crises.
Only recently has supervision become a function of central banks, in which the
Objectives of safety and efficiency are promoted by monitoring the systems.
existing or planned, by their assessment against these objectives and, when
necessary, through the induction of changes. However, although recent, this
development in the nature of surveillance has been rapid and the function is now
recognized as one of the main responsibilities of central banks.
In practice, most central banks use moral suasion in their activities.
surveillance shifts. Persuasion is a communication strategy that consists of
to use logical-rational or symbolic resources to induce someone to accept an idea,
an attitude, or to take an action.
There are, for example, ways to pressure banks to offer lines of
credit for small business owners and low-income individuals. One of them would be through
from implicit moral persuasion, where the Central Bank influences the actions of banks by
means of pressure for the banking system to be more accessible. Another way
it would be through laws on financial disclosure.

Interest
Interest rates, in turn, influence economic activity and inflation.
The interest rate plays an important role in this system.

An increase in this rate affects the investment decisions of entrepreneurs and

household consumption.
With higher taxes to take out loans and bear the costs of 'carrying' your
stock, the entrepreneur reduces his investment.
Families, in turn, tend to prefer saving rather than consumption,
once it is more expensive to pay in installments for your purchases and it may be more advantageous
leave your money invested earning high interest (investments linked to interest are
more attractive when they are high, as the return in the future will be greater).
The combination of reduced investments and consumption results in a reduction of
economic activity of the market. With the decrease in demand, prices drop and the
inflation, which is the general price index, also falls.
Therefore, this is a mechanism that controls the price level to keep it within the
However, high interest rates for an extended period may stop raising the
economic growth (reduction of growth ofGDPdue to the reduction of activity
economic). The State, in turn, suffers from the increase in the cost of debt rollover,
because high interest rates increase the outstanding balance of the internal debt over time,
increasing government spending - moderated by fiscal policy - and putting pressure on the
public deficit.
To control the money supply, BACEN can also issue banknotes. But
this is not a commonly used practice, as it tends to increase inflation, since there would be no
a growth in the supply of products and services that would justify an increase in supply
of currency. In other words, since there was no increase in the country's wealth, no
There is a reason for issuing currency.