Monetary policy of the state and its specificity in the United States economy
The essence, goals, instruments and results of the state's monetary policy
The economic nature of money implies the continuity of their circulation. As a result, temporarily free cash must be accumulated in credit institutions and transformed into investments.
Credit relations - economic relations regarding the accumulation and loan provision of temporarily free cash on terms of repayment, urgency and payment.The credit system as the most important link in the market infrastructure is a set of credit relations, forms and methods of lending, as well as credit institutions that can mobilize temporarily free cash, turn them into loans and, ultimately, investments. These are banks, investment funds, etc.
In a modern market economy, the credit system mediates the whole mechanism of social reproduction, accelerates the process of concentration of production and the centralization of capital. It was formed under the influence of the following processes:
• As a result of concentration and centralization of bank capital, the largest banks emerged, whose activities not only affect the state of the national economy as a whole, but also go far beyond its limits. It is about the formation of transnational banks (TNB);
• the merging of banking and industrial capital and the formation of financial capital, financial and industrial groups (FIGs). The effectiveness of this splicing is confirmed by the fact that even during periods of economic decline within the FIG, economic growth is ensured;
• Deepening the specialization of credit and financial institutions, which indicates that the modern credit system is becoming more flexible and comprehensive, which means that it fully implements the function of accumulating savings and transferring them to investments, actively participates in the processes of accumulation and efficient allocation of capital.
The most developed and universal form of credit is the bank, provided by banks to any business entities in the form of cash loans. Banks are the core of the credit system.
In a market economy, the banking system is often two- or three-tiered. The top level is occupied by the central bank. It regulates the activities of commercial banks and specialized financial institutions, i.e. savings institutions, insurance companies, pension funds, investment companies. Such regulation is carried out in order to ensure normal monetary circulation as the most important condition for sustainable economic growth.
The main functions of the central bank:
• money issue;
• Control over money circulation in the country;
• control over the activities of commercial banks and assistance in their work.
Commercial banks that occupy the lower level in the two-tier banking system under consideration are private banks whose scope of activities includes a wide range of financial and lending functions: accumulation of savings and lending as production and non-production spheres; organization of payment turnover in the national economy; purchase and sale of securities; placement of government loans, etc. Acting as investors, banks, as a rule, invest money in bonds and as an exception - in shares.
Bank profit is defined as the difference between the amount of interest charged to borrowers and the amount of interest paid to depositors. In addition to the bank's profit, bank's income also includes profits from investments, exchange transactions, commission fees.
The banking system is the basis of the country's credit system. In addition to banks, the credit system includes so-called non-banking specialized financial institutions. The latter occupy the lower level in the credit system. For a long time they played a subordinate role in relation to commercial banks. After the Second World War, their positions increased markedly due to the growing significance of the operations on which they specialized, with the simultaneous penetration of these institutions into the sphere of activity of commercial banks. The institutions under consideration do not have the universality of the latter, but specialization in lending to certain spheres and branches of economic activity, as well as on a narrow range of operations, gives them some advantages.
An example is the activities of investment companies. They place their shares among small holders and purchase securities from firms of various industries for the received funds. Due to the dispersal of funds, the risk of loss of savings decreases because of the possible bankruptcy of these firms, which attracts investors.
Under the monetary policy of the state is understood the set of measures of economic regulation of monetary circulation and credit aimed at ensuring sustainable economic growth by influencing the level and dynamics of inflation, investment activity and other major macroeconomic processes.
Monetary policy is the most important method of state regulation of social reproduction in order to provide the most favorable conditions for the development of a market economy. It is carried out by the central bank, which regulates the money issue, facilitates or hinders the issuance of loans to commercial banks. Thus, the central bank influences private investment activity, the dynamics of consumer demand, the level of prices.
The main instruments of the monetary policy include operations on the open market, changing the discount rate (discount policy) and the norm of mandatory reserves.
The open market operations are most actively used by the central bank with government securities. So, in order to prevent the overheating of the economy, a reduction (compression) of the money supply is necessary. The central bank sells government bonds to the population and commercial banks under a tempting percentage. The central bank often conducts these operations in the form of repurchase agreements (REPO). The sale of securities in this case involves the central bank's obligation to buy them at a higher price after a certain period. The difference between the repurchase price and the sale price serves as a percentage for the provision of cash.
As a result of operations on the open market, part of the money is withdrawn from circulation, the credit resources of banks are narrowing. There is a multiplicative reduction in the volume of credit money, and therefore, of the circulating money supply. The interest rate increases while business investment activity decreases.
The above mechanism works in the opposite direction. In the face of the looming recession, the government buys securities through the central bank. The excess reserves of commercial banks are increasing, therefore, their credit resources are increasing. There is a multiplicative increase in lending money in the economy, which means an expansion of the money supply. The consequence of the growth in the supply of money is a decrease in the interest rate and an increase in private investment activity.
The central bank also regulates discount rate, determining the amount of payment for loans that the central bank provides to commercial banks. The central bank can lower the discount rate, expecting increased interest in obtaining loans from commercial banks, increasing their activity in providing loans and ultimately increasing the money supply in the economy. The consequence will be a decrease in the interest rate on loans from commercial banks, accompanied by an increase in investment activity in the country.
If the central bank raises the discount rate, then the possibilities for obtaining commercial credit from its banks are reduced. As a result, the capacity of commercial banks to provide loans, create credit money is reduced. There is a relative reduction in the money supply, money supply. The interest rate should increase, while the investment activity should decrease.
To increase the excess reserves of commercial banks, short-term loans are issued, while in order to overcome the difficult financial situation, the central bank provides them with medium-term and long-term loans. As a rule, the discount rate of the central bank is lower than the interest rate of the interbank loan, but the provision of loans by the central bank may be accompanied by administrative restrictions.Loans of the central bank increase the credit resources of the banking system as a whole, which creates conditions for a multiplicative increase in the money supply in the economy, whereas inter-bank loans provide only redistribution within the banking system of available reserves.
However, central bank loans constitute a relatively small part of the funds used by commercial banks. The discount rate of the central bank is to a greater extent a barometer of the monetary policy pursued. Reduction of the discount rate means the beginning of the expansionist policy and entails a decrease in interest rates on the interbank loan, and further for the non-banking sector.
Less often, as a tool of monetary policy, change in the norm of mandatory reserves. Increasing this rate reduces excess reserves, and thus the ability of commercial banks to create credit money. Reducing the norm has the opposite effect. In the first case, the interest rate will rise, and in the second case it will decrease. Investment activity, on the contrary, decreases in the first case and increases in the second, which will inevitably affect the growth rate of the economy.
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