Monetary Policy
Plain definition
Actions by a central bank to influence the money supply, interest rates, and credit conditions in pursuit of goals like stable prices and full employment.
In economics
Expansionary monetary policy (lower rates, asset purchases) stimulates spending and employment but risks inflation; contractionary policy (higher rates, asset sales) fights inflation but can slow growth and raise unemployment. Policy works with lags, so central banks must act on forecasts, not just current data.
Example
Facing a recession, the Fed cuts its policy rate from 4% to 1%. Banks lower loan rates, businesses borrow to expand, and homebuyers enter the market. The resulting spending boost helps close the recessionary gap over the following year.
Monetary policy is confused with fiscal policy. Monetary policy is run by the central bank through interest rates and the money supply; fiscal policy is run by the government through taxes and spending. They can reinforce or work against each other.