Central bank policy is a set of rules governing how much money the central bank creates and when it makes it available to the economy. The aim is to manage inflation and foster economic growth in the national economy. Central banks also play a vital role in the global economy by managing currency stability and overseeing international payments systems.
The first challenge is to provide price stability (usually viewed as low inflation over the long run). It’s important for policymakers to be credible in this goal, and that can be enhanced through good communication. For instance, if policymakers communicate that they plan to tighten monetary policy when they see signs of high inflation, people will believe them and may expect prices to rise less quickly than they would otherwise.
Changing monetary policy has several effects in the real economy, but the one most people focus on is how it affects borrowing costs. If interest rates rise, consumers will be less likely to spend and businesses will be less likely to invest. This reduced level of activity will reduce overall demand for goods and services, which in turn will push down prices.
Another way central banks can influence the economy is through its balance sheet. By purchasing assets, such as commercial papers or mortgage-backed securities, it can increase the size of its balance sheet, thereby lowering short-term interest rates for banks. The IMF maintains a database that tracks these direct market interventions.