This article justifies that the main aim of monetary policy is economic growth.
Economic growth has become one of the main aims of monetary policy in recent years.
Economic growth implies an increase in the total physical or real output, production of goods for the satisfaction of human wants.
In other words, it means a sustained increase in the national and per capita income over time. Monetary policy helps in achieving sustained and continuous economic growth partly by maintaining equilibrium between the total demand for money and total production capacity of the economy and partly by creating favorable conditions for saving and investment.
The attainment of equality between demand and supply implies flexible monetary policy restricting bank credit when the total demand for money is excessive under inflationary conditions and expanding credit when there is a deficiency of demand for money. In other words, monetary authorities follow an easy or tight monetary policy to suit the requirements of growth. Traditionally, the objective of monetary policy had been to contain slumps or booms.
The conventional concern of monetary policy with short-run problems of economic instability and fullest utilization of existing capital equipment and resources did not permit it to be used as a mechanism in a process of growth for raising income, output and employment. Thus, the slant today is in favour of growth-oriented monetary policy. The primary aim of such a growth-oriented monetary policy is to keep the fluctuations and prices under control so that the process of growth is not impaired by them.
As the process of growth is initiated in an economy, there is a continuously rising demand for money on account of several reasons. The demand for money is bound to go up in a developing economy on account of increased investment expenditures in developmental activities.
This makes it imperative for the monetary authorities to increase the supply of money which has almost to grow roughly at a rate equal to that of the real income. The growth-oriented monetary policy is of particular importance in developing economies where the growth rate can be raised through the sectoral impact of monetary policy.
If the central banks through money variations raise prices a little in the industrial sector and keep mild deflationary conditions in agriculture, the economic system as a whole may stand to gain in the form of structural changes most appropriate for rapid economic growth.
Such a policy also helps growth of poor economies by removing balance of payments difficulties. In poor economies, as the process of development starts, the high propensity to import along with limited capacity to export gives rise to balance of payments difficulties. But some economists have expressed doubts on the efficacy of growth-oriented monetary policy both in advanced and developing economies.