Accommodating monetary policy definition

08 Mar

Friedman was talking about Japan in 1989, when Japan's very tight monetary policy produced deflation which resulted in a zero interest rate.

Friedman wasn't exactly advocating the "quantitative easing" that's been the Fed's strategy from 2008 to 2014.

For this reason, most central banks alternate between policies of cheap money and tight money in varying degrees to encourage growth while keeping inflation under control.

The Federal Reserve policy of increasing the supply of money to make credit more readily available.

Conventional monetary policy is at its maximum potential to drive growth under ZIRP.

ZIRP is very closely related to the problem of a liquidity trap, where nominal interest rates cannot adjust downward at a time when savings exceed investment.

In his paper on this topic, Michael Woodford finds that, in a ZIRP situation, the optimal policy for government is to spend enough in stimulus to cover the entire output gap.

(Note: The quote from footnote #3 may be misleading.However, some economists—such as market monetarists—believe that unconventional monetary policy such as quantitative easing can be effective at the zero lower bound.Others argue that when monetary policy is already used to maximum effect, to create further jobs, governments must use fiscal policy.A monetary policy in which a central bank sets low interest rates so that credit is easily attainable.This makes borrowing easy for business, which stimulates investment and expansion of operations.