Monetary policy is about exercising control over the money supply (the amount of money circulating in the economy) with the aim of influencing the economy (usually in line with political objectives such as low unemployment and economic growth).
It is usually administered by a Government-appointed central bank, such as the Bank of England, which has had independence in the area since 1997. It now makes its own adjustments to money supply with the aim of meeting Government inflation targets.
Key monetary tools available to the central banks included setting the rate of interest, buying and selling foreign currency and setting the level of reserves banks must maintain relative to the value of their loan portfolio.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
BP's 'long, painful decline' – and why next year could be even tougherOpinion Long-suffering shareholders in oil giant BP have been pushing for change. It won’t come soon enough, says Matthew Lynn
-
Investment trusts tap the profits in exotic and obscure global marketsOpinion Peter Walls, manager of the Unicorn Mastertrust fund, highlights three investment trusts as he shares where he'd put his money
-
Bank of EnglandGlossary The Bank of England is the UK's central bank. It started life in 1694 as a private bank set up by London merchants as a vehicle to lend money to the government and to deal with the national debt.
-
Index-linked gilts
Glossary Index-linked gilts are sterling bonds issued by the Bank of England and listed on the London Stock Exchange, introduced to act as a hedge against inflation for pension funds.
-
Money supply
Glossary Money supply is simply the amount of money available in the economy.