What is Accommodative Monetary Policy?

Accommodative monetary policy, also known as easy monetary policy or loose monetary policy, allows the fiscal reserve to increase in relation to national income and the positive function of money demand. This policy generally includes a lowering of interest rates. The purpose of the policy is to energize the national money stock. Banks and other economic institutions are responsible for the implementation of accommodative monetary policy.

What does Accommodative Monetary Policy really mean?

Accommodative monetary policies are often put into place to prevent a weak aggregate demand as this can result in an economic recession. During this time citizens prefer to save money as opposed to investing. As part of this policy, bankers see to incentivize with an expansive monetary measure. The hope is to move toward economic growth and the expansions of companies. By utilizing various methods of stimulus, banks seek to provide the nation with a restorative tonic complete with the production of goods and services. The side effect of the tonic is an increase in the level of income citizens see. It also encourages businesses to grant more credit to both businesses and private citizens. Both GDP growth below potential and two consecutive quarters of negative growth give reasons to enact accommodative monetary policy. Other considerations are a minimum investment in capital goods, a steady rise in the unemployment rate, and poor inflationary pressures. When formulating accommodating monetary policies, it is important to take into account inflation and interest rates. Through management of inflation and interest rates, policymakers seek to increase the national fiscal supply. These policies and variables are reflected in national bank mandates. If the amount of money in circulation within a nation is low, the government often enacts widespread accommodating monetary policies to increase the ready money in respective territories. However, in other situations, different methods can be utilized in a restrictive monetary policy.

Methods of Expansive Monetary Policies

Banks and governments alike can employ several mechanisms to carry out accommodating monetary policies. The following methods are the most commonly employed measures related to expansive monetary policies.

• Modify the permanent facilities. While increasing the fiscal quota in circulation through lowering interest rates, financial institutions grant more credit to both private citizens and corporations thereby increasing the amount of money flowing in the economy.
• Reduction of the cash ratio. By reducing the cash ratios, financial institutions will have more fiscal liberty in allocating money to credits and loans instead of covering cash ratios.
• Operations in the Open Market: Through careful analysis of objectives, financial institutions can choose one of the following open market operations:
• • The main financing operations require the national bank lowering the official interest rate.
• • There is also the ability to buy financial assets through special structural operations. The most well known is the purchase of government debt or government bonds. This creates a fiscal innoculation for the economy. Ideally, the purchases will be used to reinvest in the market.
• Non-conventional Monetary Policies. There are policies that can be put into action if the conventional methods do not appear to be working. One example is helicopter money.

While ideally these practices and policies would stimulate economic growth, it is vital to separate the concept of accommodative monetary policy with economic growth. The effects of accommodative monetary policies may not effect for years. In addition, other parameters can affect the successfulness of accommodative monetary policies such as inflation. If not enacted correctly, the reverse of desired outcomes may appear.

Related Topics

• Legal Tender
• Numismatics
• Gresham's Law
• Barter
• Double Coincidence of Wants
• Parity
• Functions of Money
• Medium of Exchange
• Unit of Account
• Store of Value
• Time Value of Money
• Standard of Deferred Payment
• Liquidity Preference Theory
• National Savings and Investment Identity
• Circular Flow of Money
• Commodity Money
• Gold Exchange Standard
• Bretton Woods System
• Fiat Money
• Money Supply
• M1 and M2 Money Supply
• Monetary Base
• Savings, Demand, and Time Deposits
• Banks
• How Do Banks Create Money? 
• Financial Intermediary
• Bank Balance Sheet
• Money Multiplier Formula
• Velocity of Money
• Multiplier Effect
• Quantity Equation of Money
• McCallum Rule
• Neutrality of Money
• Real Bills Theory
• Banking System?
• Central Bank
• Federal Reserve System
• Federal Open Market Committee (FOMC)
• Fed Balance Sheet
• Term Auction Facility
• Taylor Rule
• How is the Federal Reserve Bank Organized?
• What is Bank Regulation?
• CAMELS Rating
• FDIC
• CFPB
• Bank Supervision
• Bank Runs
• What is Deposit Insurance?
• Federal Deposit Insurance Corporation
• Lender of Last Resort
• Central Banks Carry Out Monetary Policy
• Open Market Operations
• Bank Reserve
• Discount Rate
• Federal Funds Rate
• Monetary Policy
• Contractionary and Expansionary Monetary Policy
• Loose vs Tight Monetary Policy
• Easy Monetary Policy 
• Accommodative Monetary Policy
• Dove & Hawk (Monetary Policy) - Explained
• Tight Monetary Policy - Explained
• Stabilization Policy
• Pushing on a String
• The Effect of Monetary Policy on Interest Rates
• Federal Funds Rate
• Gibson Paradox
• Vasicek Interest Rate Model
• Equation of Exchange (Economics)
• The Effect of Monetary Policy on Aggregate Demand
• Quantitative Easing
• Reserve Currency
• What are Excess Reserves?
• Unpredictable Movements of Velocity
• Central Banks - Unemployment and Inflation
• Inflation Targeting
• Fisher Effect
• Asset Bubbles and Leverage Cycles
• Countercyclical
• Money Capital Market
• Quantity Theory of Money
• Aggregate Expenditure Model
• IS-LM Model
• European Capital Market Institute