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Can the combination of money supply and interest rates be used as an effective tool for monetary policy?

Monetary policy

Interest rate channel

Cost-push inflation

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The combination of money supply and interest rates can be an effective tool for monetary policy, as evidenced by research in emerging economies like Pakistan and Nigeria. Studies show that both money supply and interest rates play a significant role in predicting changes in inflation. While interest rates may not fully capture the overall stance of monetary policy, they still have a positive long-run relationship with inflation. In Nigeria, money supply has been found to substantially influence GDP, indicating its effectiveness in ensuring economic growth stability. Therefore, utilizing a combination of money supply and interest rates can enhance the effectiveness of monetary policy in managing inflation and promoting economic stability, especially when considering the various monetary transmission channels and external shocks.

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Open access•Journal Article•DOI Assessment of interest rate channel Effectiveness in the transmission of Monetary Policy in Nigeria Bulus Yusuf, O. G. Afiemo, Auwal Isah - Show less +2 more 04 Nov 2022-Applied Journal of Economic Managemnet and Social Sciences	The study focuses on the interest rate channel's effectiveness in monetary policy transmission in Nigeria, suggesting that combining money supply and interest rates may not effectively stabilize prices.
Open access•Journal Article•DOI Effectiveness of monetary policy: Application of modified Peter and Clark (PC) algorithms under Graph-Theoretic Approach Rizwan Fazal, Md. Shabbir Alam, Umar Hayat, Naushad Alam - Show less +3 more 27 Sep 2021-Scientific Annals of Economics and Business 2 Citations	The study suggests that interest rates influence inflation positively in Pakistan, indicating the potential effectiveness of using a combination of money supply and interest rates for monetary policy.
Open access•Journal Article•DOI Measuring monetary policy by money supply and interest rate: evidence from emerging economies Trung Thanh Bui, Kiss Dávid Gábor - Show less +1 more 01 Sep 2021-Review of Economic Perspectives	Yes, the combination of money supply and interest rates can be effective for monetary policy in emerging economies, as both variables are useful predictors for changes in inflation.
Open access•Proceedings Article•DOI The Effect of Monetary Policy Indicators Analysis by Using Interest Rate and Money Supply Approach to the Inflation in Aceh Leli Ansari 25 Oct 2019 1 Citations	Yes, the combination of money supply and interest rates can be effective for monetary policy. Money supply approach shows a negative relation to inflation, while interest rates approach has a positive impact.

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How do high interest rates affect inflation and monetary policy?5 answersHigh interest rates have a significant impact on inflation and monetary policy. Research indicates that in many cases, there is a causal relationship from interest rates to inflation rates, especially in developing and Islamic countries. High interest rate policies, as seen in Poland, can lead to unfavorable consequences such as delays in investments, cyclical demand, and increased costs for enterprises, affecting both the real and financial spheres. Studies also show that a rise in interest rates can help control inflation by appreciating the exchange rate, indirectly impacting output positively under certain conditions. Additionally, the elasticity of marginal utility and relative risk aversion characteristics of economic agents play a crucial role in determining the relationship between interest rates and inflation in general equilibrium models.

What is the effect of money supply on inflation?5 answersThe impact of money supply on inflation varies across different studies. In Nigeria, research suggests that narrow money supply positively influences inflation and real gross domestic product, while broad money supply does not significantly affect inflation or economic growth. Conversely, in Sri Lanka, historical data indicates that money supply did not have a statistically significant impact on domestic inflation for the period 1959-1974, but showed significance in the more recent years of 1967-1974. Additionally, studies in the UK reveal that monetary surprises strongly affect inflationary expectations and can lead to positive reactions in long-term real interest rates. These findings highlight the complex relationship between money supply and inflation, influenced by various economic factors and contexts.

What are the impact Interest Rate on money supply in USA?4 answersInterest rates have a significant impact on the money supply in the USA. The choice of operating procedure by the monetary authority, such as a stricter interest rate-targeting regime, can render central bank balance sheet expansions ineffective. Expansive monetary policy with low, zero, or negative interest rates can encourage financial bubbles on the stock market, leading to a positive impact on share prices. Additionally, the money supply has a positive liquidity effect, and liquidity has a significant positive effect on share prices. In terms of interest rate indices, the minimum rediscount rate and savings rate have made a significant positive impact on money supply, while the lending rate has made an insignificant negative impact. Therefore, interest rates play a crucial role in determining the money supply in the USA, and the monetary authority's management of interest rates is essential for maintaining stability in money supply.

How does monetary policy affect inflation rates and unemployment levels?5 answersMonetary policy has varying effects on inflation rates and unemployment levels. The wage Phillips curve shows a time-varying slope, indicating that the tradeoff between wage inflation and unemployment changes over time. The Federal Reserve's policies have been found to artificially manipulate interest rates to curb long-term increases in unemployment. A matching model of the economy reveals that high unemployment leads to lower prices and shorter queues for labor services, while low unemployment leads to higher prices and longer queues. In Indonesia, monetary policy has a temporary impact on the unemployment rate, with variables such as real interest rates and economic growth affecting unemployment in the short run. Additionally, evidence suggests that contractionary monetary shocks raise unemployment more strongly than expansionary shocks lower it.

How does monetary policy affect interest rates?5 answersMonetary policy affects interest rates through various channels. One channel is the impact of uncertainty shocks on bond risk premia, which leads to changes in long-term rates. Another channel is the dual Fisher and Wicksell effects, which influence inflation and interest rates. Additionally, countercyclical interest rate policy responses can affect the cost of capital and conditions for collusion in loan markets, thereby influencing the transmission of policy rates. The monetary policy stance also affects the slope and curvature of the yield curve by influencing the precautionary motives of agents and nominal and real risk in the economy. Furthermore, when nominal short-term rates are close to zero, expansionary monetary policy can still work through the conventional interest rate channel by pushing down longer rates, although the effect may be weakened.

How does interest rate affects money supply?5 answersInterest rates have an impact on money supply. The relationship between interest rate targets and money supply is analyzed in several papers. One paper finds that interest rate targets with a positive inflation feedback generally correspond to money growth rates rising with inflation. Another paper suggests that the inability of the monetary authority to narrow the gap between saving and lending rates remains a key problem in maintaining stability in money supply. Additionally, it is noted that the interest rate is proportional to the square of the velocity of circulation of money and does not regulate economy equilibrium. These findings highlight the importance of managing interest rates effectively to ensure stability in money supply.

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