Monetary regulation of the economy

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

Modern market needs monetary regulation from external regulators. This is due to the needs of the development of the market system, since it is not subject to the solution of many socio-economic problems by itself. The concept of the “invisible hand of the market”, according to which the latter should cope with all challenges without anyone's help, has failed in many countries. And Russia well remembers the "shock therapy" of the nineties of the last century. The realization that the market itself cannot exist came too late. Monetary regulation of the economy is one of the instruments of external control of the market system. According to many economists, this is the most important tool. In the article, we will take a closer look at monetary policy, goals, tools, types. And let's start with a basic definition.

Concept

Monetary regulation of the economy is a set of measures taken by the Central Bank (CB) aimed at changing the parameters of the money supply.

This means that the Central Bank influences the money supply in the economy. And this measure affects the dynamics of money turnover. Below we will analyze the methods of monetary regulation in more detail.

Goals

At the macroeconomic level, the following regulation objectives are identified:

1. Creating conditions for economic growth.
2. Maintaining stable prices.
3. Ensuring the stability of interest rates in the domestic money market, exchange rates.
4. Achieving the maximum level of employment of the population.

The main goal of monetary regulation is to maintain stable prices. Everything else is derived from them. In the conditions of the Russian economy, maintaining stable prices depends on a consistent reduction in inflation. It is she who influences the investment climate in the country and the strengthening of long-term economic growth.

The concept of inflation

Inflation is a decrease in the purchasing power of a currency due to its depreciation. For example, annual inflation is fixed at 10%. It follows from this that for 1000 rubles today it will be possible to buy the same amount of goods as for 1100 in a year.

Monetary regulation of the Central Bank is aimed primarily at reducing inflation. Do not be surprised that Russian banks provide expensive loans. This is due to high inflation. Alsoit is impossible to concentrate large sums in one's hands, since every day the capital will be "eaten up" by the invisible laws of the market.

Limited capacity of the Central Bank

The Central Bank has no legislative functions, so its task is only to smooth out market fluctuations in certain segments of the financial market.

Despite the limitations, the Central Bank can conduct monetary regulation, which is designed to:

1. Improve the efficiency of cash flow participants.
2. Protect the interests of the balance of market participants.
3. To protect them from artificially increasing their costs.
4. Create conditions for investment.
5. Develop a competitive environment in the market.
6. Expand the market of banking services and improve their quality.

The role of monetary regulation is huge both for the macroeconomy in general and for each individual citizen in particular. Today we are seeing a situation where inflation is lowered. This led to a reduction in rates on bank deposits, which today rarely exceed 8% per annum. However, at the same time, economic regulators artificially reduce the real balance of market participants through other methods, for example, through the devaluation of the national currency. Those. the artificial decrease in the value of the ruble leads to a decrease in its purchasing power in world markets. Given the fact that our country imports all final consumption goods, we are seeing a significant increase in prices. From this it is clear that monetary regulation in Russia has its ownspecific feature, unlike other countries. Therefore, it cannot be said that for each country there are universal recipes for the right strategy. Methods that are effective for one country can lead to a complete financial collapse in another.

Objects

Monetary regulation is aimed at the following objects:

1. Velocity of money.
2. Volume of loans.
3. National currency rate.
4. Demand and supply of national currency.
5. Money supply in the economy.
6. Coefficients of money multiplication.

Monetary regulation of each of these indicators has a time frame. They are established at various levels of government. Therefore, it cannot be said that the regulation of the monetary system allegedly does not depend on the state for the simple reason that it is the Central Bank, which is not subordinate to state authorities, that regulates itself. It is on the coordinated actions of the state and the Central Bank that the effectiveness of the actions of the latter depends.

Mechanism

The monetary mechanism includes:

• Forecasting.
• Planning
• Methods and tools of influence.

Motives for the need for money

The regulation of monetary policy also depends on the motive for the need for money.

The first kind istransaction motive. It ensures the current economic functioning of the market participant. For an ordinary person, a transactional motive means a reserve of money for monthly expenses until the next salary: groceries, utility bills, cell phone payments, etc.

For enterprises, the transaction motive means funds that are intended to support current economic activities (settlements with suppliers, payment of rent, etc.).

For the state, this is a reserve of currency that allows for settlements in the foreign market.

The second kind is the precautionary motive. It allows a market participant to create a reserve. For ordinary citizens, this is saving for a rainy day, making deposits in order to save money, etc. Enterprises and states create reserve and stabilization funds.

The third kind is a speculative motive. Modern money in itself is not a source of value storage. Therefore, part of the funds is used to purchase intangible (financial) assets that generate income in the form of various percentages. These include bonds, stocks, industrial financial instruments.

Demand and supply of money

Demand and supply of money are the most difficult to predict quantities. It is impossible to predict the future behavioral factor, since it depends not only on macroeconomic factors, but also on the development of the global economy. For example, the development of cryptocurrencies and e-commerce leads to a decrease in demand for national currencies. An increase in the demand for money depends on the followingfactors:

1. Decrease in inflation and inflation expectations.
2. Growing confidence in the banking system.
3. Growing economy.

One can give a good example of the monetary regulation of the Russian Federation after the crisis of 2008: the state passed a law, according to which all bank deposits were insured without fail up to a certain amount. And one could not be afraid that the bank would go bankrupt, since the state would compensate for the loss through insurance companies. This has led to increased public confidence in the banking system.

Demand for money is a key indicator. Effective methods and instruments of monetary regulation depend on the high demand for money. It is also worth considering that the desire to have money and the possibility of obtaining it do not coincide. Here we are faced with such a concept as liquidity - cash and non-cash funds in bank accounts. Demand for money is defined as a proportional part of liquidity.

Velocity of money

The monetary policy of regulating the economy also depends on such an indicator as the velocity of money circulation. The growth of long-term deposits of banks contributes to a decrease in the velocity of money, and vice versa, the preservation of a large amount of cash in the economy increases the velocity of money.

Money offer

The market regulator must correctly calculate the level of saturation of money in the economy. Can it effectively use the increase in the money supply? What are the levelsinflation, inflationary expectations and risk levels in the economy? The exact answers to these questions affect the behavior of the regulator. The beginning of the 2000s in Russia can be cited as an example. The huge influx of money into the country, associated with super profits from the sale of hydrocarbons, had a negative impact on the economy as a whole. She could not "digest" the entire money supply without damage to production. Inflation accelerated to 10-12% per annum. In this regard, there was a significant rise in the cost of loans. Those sectors of the economy that were not associated with the oil and gas sector were hit hard: agriculture, transportation, transport, and the public sector. Investments in these industries were negligible compared to investments in other areas. There was also an imbalance in the incomes of ordinary citizens. For example, the average salary of a teacher was in the region of 6-7 thousand rubles a month, and a laborer at construction sites earned several thousand rubles a day. Today we see that the disproportion in industries is not so noticeable, but now we have completely different problems in the economy.

Money supply determined by:

1. Monetary base (assets) of the Central Bank. This includes loans to banks, securities - usually bonds in treasury notes of the world's leading economies - gold and foreign exchange reserves.
2. Interest rate on the domestic money market. It is also called the key refinancing rate. This is the percentage at which the Central Bank issues loans to commercial banks. Naturally, it is lower than the percentages at which the latter issue loans to individuals and business entities, since itthe future profit of the bank and the percentage of risk and defaults are superimposed. For example, if the key refinancing rate is 7%, then the interest on a bank loan for an individual cannot be lower, since no one will lend at a loss. The interest rate in the short-term market is formed on the basis of the ratio of the banking system's reserves to its deposits. Today we are witnessing an interesting situation that could not have been imagined in the entire recent history of our country: people have put huge amounts of money into bank deposits, which, moreover, are almost all insured. In this regard, financial regulators are squeezing citizens' money out of banks, creating conditions for low interest rates on deposits.
3. Creating a permanent reserve.

The banking system as the most important factor influencing the money supply

The banking system has the greatest influence on the money supply. Let's list the methods and tools of monetary regulation:

1. Reducing or increasing the supply of money.
2. Creating a sustainable cash flow.
3. Conducting transactions in the financial market to regulate money circulation.

The methods of monetary regulation in economically developed countries and developing countries are fundamentally different.

The central bank is a key player in regulation. To do this, he uses the following tools to regulate monetary policy:

1. Cash issue.
2. Refinancing of banks, i.e. the Central Bankbecomes a "bank for banks" and issues loans to commercial banks at rates set by itself. The latter refinance these funds in the domestic market at a higher interest rate.
3. Operations on the open market for the purchase and sale of securities and currencies for settlements in the international arena.

Thanks to the operations listed above, a single mechanism of monetary regulation is being formed.

So, the most important role in macroeconomics belongs to the Central Bank of the country. We will cover this economic entity in more detail later in the article.

Status of the CBR

In the Russian banking system, the CBR is the country's main bank. It is at the top of the entire financial system of the country and is designed to adjust the course of all other banks in line with the overall economic strategy. This happens through refinancing and control. As a last function, the Central Bank has the right to suspend the activities of any credit institution by revoking its license. Recently, a rather impressive list of such unfortunates has already been accumulated. Many even have the opinion that the Central Bank is completely clearing the ground for large banks with state participation.

The Central Bank is also a key agent of the state's monetary policy. However, he does not use directive methods to achieve his goals, but economic methods of management.

Who is the Central Bank of Russia subordinate to?

Despitethe fact that the Central Bank of Russia is the main bank of the country, which is the only one who has the right to print rubles, it is not subordinate to either the government of the Russian Federation or any other state body. If our state does not have enough money to pay salaries, pensions and benefits, then the Central Bank of Russia will not lend to the government. This paradoxical system was built from the very beginning of the formation of independent Russia. It is this circumstance that gives reason to many political scientists to call B. N. Yeltsin, the first president of Russia, a traitor to the Motherland. Who is the Bank of Russia subordinate to? Some say with confidence that the Central Bank of our country is a branch of the Federal Reserve System, others attribute it to the International Monetary Fund, which is more fair, since there is a direct mention of it in the Law. However, both of them are sure that we are controlled by the Rothschilds and Rockefellers.

But it is worth analyzing the Federal Law on the "Central Bank of the Russian Federation", everything falls into place: the Central Bank consists of the head and members of the board of directors in the amount of 14 people. All of them are elected by the State Duma in agreement with the President of the Russian Federation. Now it is necessary to answer the logical question: is the Central Bank of Russia such a pro-American organization? An affirmative answer will be only if the country's parliament itself is also pro-American.

Also, for those who like to attribute the Central Bank of Russia to the United States, we will explain that since 2014, 75% of all profits of the Central Bank of the Russian Federation are transferred to the budget of the Russian Federation, and the remaining 15% go to Vnesheconombank.

Be that as it may, the law really severely separates the Central BankRussia from the government of the Russian Federation. And if they quarrel among themselves, then the supremacy will be with the Central Bank, since controversial issues are resolved in International Courts, the decisions of which, according to the Constitution, are higher than the decisions of internal courts. This is our Constitution, which has been in force in the country since 1993.

Functions of the Central Bank of Russia

The Bank of Russia performs the following functions:

1. Is a lender for credit institutions within the country.
2. Developing a unified monetary policy together with the Government of the Russian Federation.
3. Has a monopoly on the issuance of the national currency.
4. Sets currency control.
5. Sets the rules for conducting banking operations, reporting for the banking system and accounting.

From the list, you can see that the Central Bank works together with the government. That is, they act as partners, and there is no hint of subordination. It is this fact that allows many to say that Russia is a colony of the Western financial system. However, advocates of such a system are confident that it will curb the arbitrariness of local Russian officials from the uncontrolled issue of money and from constant internal lending. It is enough to analyze the amount of corruption that is no longer hidden to ask the question: is external control over the printing press really a negative factor? Perhaps only this fact somehow saves the country from total inflation.

Attempts to regain "independence"

In our country, there are a number of deputies and politicians who openly advocate the nationalization of the Central Bank. They constantly submit a draft law to the State Duma, but a negative wave of public criticism immediately rises against it. Why is this happening? It is possible that our citizens do not trust our own state, which has deceived them many times. For many, the option of independence of the Central Bank of Russia from the government gives more confidence in the future than transferring it to the hands of the state, where there will be no control over the money supply. Recall the times of the USSR: everyone had money, but no one wanted to sell goods for pieces of paper that no one needed, since the state constantly interfered in the Bank's monetary and monetary policy for the sake of momentary political gain to the detriment of development. Therefore, a situation developed when manufacturers kept goods in warehouses, involuntarily creating a shortage, and exchanged it on the “black markets” at a fair price. No administrative measures helped to force the cooperators to enter the legal market. That is why our citizens were left without their deposits, since in order to restore the economy it was necessary to completely destroy them by freezing accounts and accelerating hyperinflation.

State Bank of the USSR

In the Soviet Union, the State Bank was completely subordinate to the Council of Ministers of the USSR. The amount of money was determined by directive methods. The Council of Ministers of the USSR issued an order, and the Bank issued an issue based on it. This isled to a situation that in economics is called "repressed inflation". In other words, it can be described as follows: everyone has money, but nothing can be bought with it. This is understandable: manufacturers preferred to keep goods in warehouses and not sell them, since money did not have the value that we are used to today. In fact, a natural exchange flourished, which is comparable to the feudal system. A similar situation may repeat itself if the Bank of Russia is nationalized.