The definition of monetary policy:
It is The control of the demand for, and supply of, money as a means of controlling the economy. The main tool of monetary policy is the level of interest, essentially the price of money, which a government can influence through its debt financing activities on the open market.
It is the plan undertaken by a central bank, such as the Central bank in Algeria, to influence the cost and availability of money and credit. Monetary policies are put into effect in order to help promote national economic goals.
Objectives of Monetary policy:
To maintain price stability is the primary objective of the Algerian monetary policy for which it is responsible .
THE INSTRUMENTS OF MONETARY POLICY
Reserve Requirement: The Central Bank may require Deposit Money Banks to hold a fraction (or a combination) of their deposit liabilities (reserves) as vault cash and or deposits with it. Fractional reserve limits the amount of loans
Open Market Operations: The Central Bank buys or sells ((on behalf of the Fiscal Authorities (the Treasury)) securities to the banking and non-banking public (that is in the open market).
Lending by the Central Bank: The Central Bank sometimes provide credit to Deposit Money Banks, thus affecting the level of reserves and hence the monetary base.
2 Interest Rate: The Central Bank lends to financially sound Deposit Money Banks at a most favourable rate of interest, called the minimum rediscount rate (MRR).
Direct Credit Control: The Central Bank can direct Deposit Money Banks on the maximum percentage or amount of loans (credit ceilings) to different economic sectors or activities, interest rate caps, liquid asset ratio and issue credit guarantee to preferred loans.
Moral Suasion: The Central Bank issues licenses or operating permit to Deposit Money Banks and also regulates the operation of the banking system.
Prudential Guidelines: The Central Bank may in writing require the Deposit Money Banks to exercise particular care in their operations in order that specified outcomes are realized.
Exchange Rate: The balance of payments can be in deficit or in surplus and each of these affect the monetary base, and hence the money supply in one direction or the other.
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