Monetary Policies in Cryptocurrency: Controlling Supply
Monetary Policy is the set of rules that a country’s central bank sets to control the supply of money.
What is monetary policy?
It may seem that only economists are concerned with monetary policy, but its influence is everywhere. Monetary policy is a set of actions that a country’s centralized financial institutions or regional organizations, such as the European Union, take or follow to control the overall supply of money. Compliance with these rules keeps inflation and price increases in the economy in check and creates conditions that maximize employment.
Monetary policy has both domestic and global effects, which is the reason why influential countries are constantly reviewing it. The main goal is to keep the economy functioning properly and control inflation. Under monetary policy, central banks can raise the interest rate on loans in order to restrain spending.
What are the goals of monetary policy?
Monetary policy is used by financial authorities to increase employment, stabilize product prices, and set long-term interest rates. Consequently, it stimulates economic growth and stability by increasing consumer activity. These policies also increase the level of exports and decrease imports in the country, which increases the valuation of the country’s currency.
Key tools for implementing monetary policy
Central banks use a number of tools to implement monetary policy.Central banks build new bank reserves to sell and buy short-term bonds on the open market. They buy assets to increase the money supply and decrease it by selling. Another tool used by central banks is interest rates. Public banks lend based on the interest rate set by the central bank. Public statements about future policy also move the market, making it a powerful tool.
How often does monetary policy change?
Changes in monetary policy can be made when they seem inevitable. In most cases, countries with stable economies make changes to their monetary policy after a certain period of time.
There are different rules for each country regarding the timing of monetary policy changes.
The impact of cryptocurrencies on monetary policy
Central banks have a monopoly on issuing money because they are allowed by the law of the country to manage according to monetary policy. Cryptocurrency is not inherently issued by a central bank. If the use of cryptocurrencies increases significantly, central banks could lose their monopoly. In fact, the first cryptocurrency (Bitcoin) emerged as a response to the 2008 financial crisis caused by central bank policies.
It is impossible to claim with absolute certainty that cryptocurrencies will put an end to the centralized banking system or affect monetary policy in the near future – only time will tell.