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3 Main Parameters of Monetary Policy

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There are three main parameters of monetary policy which are given below:

1. Supply of Money

2. Cost of money OR Rate of Interest

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3. Availability of Money

1. Supply of Money:

It refers to the currency issued by the monetary authority and demand deposits lying in the banks. In order to arrange for suitable supply of money, the central bank should adopt flexible methods of note-issue, minimum reserve fund method, expansion of financial institutions etc. The general public may be encouraged to deposit more funds in the banks.

2. Cost of Money or Rate of Interest:

ADVERTISEMENTS:

Another parameter of monetary policy is cost of money or rate of interest. The less developed or under developed countries should adopt money policy to promote agriculture and industrial sectors. No doubt, this method is abused by the hoarders and speculators but this discriminating policy of rate of interest is favoured in priority sectors.

Barring the small scale industries, high rate of interest must be charged from unproductive channels. In order to reduce the aggregate demand, rate of interest should be raised. This will result in reduction of availability of money. During depression period, rate of interest should be lowered so that availability of money may become easy.

3. Availability of Money:

The availability of money refers to credit expansion. According to D.C. Rowan, “The availability of money is defined as the case with which, at any given rate of interest, money can be borrowed from financial institutions.” For this, two methods i.e. quantitative credit control and qualitative credit control are adopted.

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