Monetary policy and central banking

Thispaper explains monetary policy and its functioning with central bank. Monetary policy is the process by which the monetary authorities of a country control the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The paper explains goals of monetary policy that include inflation targeting, employment, equilibration of the balance of payments, growth targets for monetary aggregates, and the stabilization of exchange rates etc. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary. The paper explains types of monetary policy; its objectives i.e. price stability and economic growth. The paper explains tools of monetary policy include quantative and qualitative. Credit rationing, change in Lending margins, moral suasion, and publicity are qualitative methods of monetary policy. Its quantative methods include bank rate policy, the repo rate, statutory liquidity ratio; the cash reserve ratio, and open market operations. The paper also explains limitations and effectiveness of monetary policy.