Monetary policy   Goals of monetary policy   RBA Charter   Role of underlying inflation   Implementing monetary policy   Tightening of MP   Loosening of MP   How other rates change   Pre-emptive decisions   'Open mouth operations' Exchange rate intervention  Monetary policy stance   Expansionary policy  Monetary policy neutrality    Restrictive MP   Transmission mechanisms   MP and economic goals   low inflation Growth/jobs  MP strengths and weaknesses

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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How monetary Policy operates to address economic problems

As we discussed when examining budgetary policy, economic problems will occur when the government's goals are not being achieved.  For example, the problem of excessive inflation and high unemployment will mean that the government has not achieved its low inflation and full employment goals.

The RBA's charter directs it to focus on the economic prosperity and welfare of Australians.   It does this by focusing on the achievement of low inflation as it is considered the key ingredient for longer term sustainable economic growth and employment creation and the maximisation of Australian living standards.  Once inflation or inflationary pressures are considered to be under control, the RBA will switch its attention to stimulating economic and employment growth in the shorter term.  

Unlike budgetary policy, the RBA will only use monetary policy to specifically target the goals associated with the achievement of internal stability, which are:

The government has made it clear that monetary policy is the key policy instrument that should be used to ‘fine tune’ or ‘manage’ the economy through each business cycle. However, the RBA will not use policy to target either external stability or equity in the distribution of income.

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