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Monetary policy instruments consists
in managing short-term rates (Fed Funds
and Discount rates in the U.S.), and
changing
reserve requirements for commercial
banks. Monetary policy can be either
expansive for the economy (short-term
rates low relative to inflation rate)
or restrictive for the economy (short-term
rates high relative to
inflation rate). Historically, the
major objective of monetary policy had
been to manage or curb domestic
inflation. More recently, central
bankers have often focused on a second
objective: managing economic growth
as both inflation and
economic growth are highly interrelated.
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