Accommodative monetary policy

Accommodative monetary policy means a policy of allowing the money supply to rise in line with national income and the demand for money. Accommodative monetary policy will also usually involve lower interest rates.

Accommodative monetary policy may also be known as ‘easy monetary policy’ / loose monetary policy.

Accommodative monetary policy involves:

  • Lower interest rates.
  • Lower interest rates tend to encourage spending and economic growth through making borrowing cheaper.
  • Allowing money supply to rise

Impact of accommodative monetary policy

In theory lower interest rates and increased money supply will:

  • It is likely to lead to higher economic growth
  • It is likely to cause relatively higher inflation rate.
  • It is likely to cause a depreciation in the exchange rate.

 

Examples of accommodative monetary policy

  • Monetary policy in US / UK post 2008/09 recession. Interest rates cut to 0.5%. Quantitative easing (increase in money supply) pursued. The aim was to overcome the recession.
  • This period of accommodative monetary policy struggled to overcome depressed demand.

 

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