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Targets of Monetary Policy: 7 Targets | Economics

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The following points highlight the seven main targets of monetary policy. The targets are: 1. A stable price level 2. A gently rising price level 3. A gently falling price level 4. Neutral money 5. Exchange stability 6. Avoidance of cyclical fluctuations 7. Full-employment and economic growth.

Target # 1. A stable price level:

One of the most popular views regarding the aim of monetary policy is that the value of money, the price level S wholesale and retail), should be kept stable. A stable price level is advocated because the change in the value of money affects different persons differently and because such changes are likely to have various undesirable effects on the economy.

Moreover, as money serves as a measure of value it is necessary that its value should be kept stable. But, past experiences have shown that complete stabilisation of the value of money is neither possible nor desirable. What is needed is mild inflation (at the rate of 2-3% per annum) or a functional rise in prices).

Target # 2. A gently rising price level:

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Some writers hold the view that monetary policy should aim at maintaining a gently (i.e., slowly) rising price level Thus according to Keynes, in a society having unemployment a gently rising price level may be a better monetary policy than absolute price stability because it provides incentive to the producers, with the result that the volume of employment and income increases.

And, as Paul Samuelson has put, “Mild inflation lubricates the wheels of trade and industry”. But this policy is inequitable as a rising price level discriminates against the wage- earners, who suffer loss of purchasing power.

Moreover, a slowly rising price-level can expand output and employment so long the country has unemployed resources and idle capacity. Once full employment is reached, such a policy loses its scope and effectiveness.

Target # 3. A gently falling price level:

An opposite school of thought advocates a slowly falling price level as the aim of monetary policy. Thus, according to Dennis Robertson, in a progressive economy a gently falling price level confers greater benefits upon the fixed income-earners.

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Moreover it is beneficial to consumers. But, it is also inequitable as it favours the creditors and wage-earners at the cost of debtors and producers. Moreover falling prices may cause a fall in the marginal efficiency of capital, which leads to a fall in investment, income and output.

Target # 4. Neutral money:

It has been suggested that the central bank should establish what is called a ‘neutral money’. It means that money should mere y perform the passive functions of acting as the medium of exchange and the unit of account, without having no dynamic functions which affect the economy. But, the objective of neutral money is not capable of wide practical application.

Target # 5. Exchange stability:

It is also suggested that the monetary policy should aim at maintaining stability in rate of exchange, as fluctuating exchange rates introduce uncertainty into foreign trade. But, it has been pointed out that exchange stability in some circumstances may also lead to instability in the domestic price level.

Target # 6. Avoidance of cyclical fluctuations:

It is also suggested that the monetary policy should be directed towards the elimination and control of business cycle fluctuations. But, it has been found that monetary policy alone cannot achieve this goal.

Target # 7. Full-employment and economic growth:

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By far the most popular and accepted aim of the monetary policy is the realisation of full employment and rapid economic growth. According to Keynes, a cheap monetary policy, cou­pled with deficit spending through the creation of new money, may promote economic growth Keynes, however, and opines that purely monetary policies cannot achieve this goal. These should be subordinate to a more important policy, viz., fiscal policy which can fight depression and unemployment.

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