Accommodative Monetary Policy – Definition

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Accommodative Monetary Policy Definition

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.

A Little More on What is Accommodative Monetary Policy

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.

References for Accommodative Monetary Policy


Academic Research for Accommodative Monetary Policy

  • Monetary policy under zero inflation: A response to criticisms and questions regarding monetary policy, Okina, K. (1999). Monetary and Economic Studies, 17(3), 157-182. The article analyzes the Japanese economy and the implementation of accommodative monetary policy by the Bank of Japan. The paper evaluates specific criticisms of the Bank of Japan’s accommodative monetary policies. Using two criteria, the researchers determine the legitimacy of the criticism and possible implications for future accommodative monetary policies.
  • Accommodative monetary policy and central bank reputation, Tabellini, G. (1985). Giornale degli Economisti e Annali di Economia, 389-425. Tabellini evaluates the way in which financial officials act throughout the monetary policy process and the way in which it affects the financial institutions’ reputation. Considering most banks face a choice which will result in either, Tabellini scrutinizes a game theoretic model of fiscal officials’ behavior by using contemporary data on reputational equilibria. Tabellini uses his results to make a hypothesis regarding policy shifts in times of inflation.
  • Monetary policy rules and macroeconomic stability: evidence and some theory, Clarida, R., Gali, J., & Gertler, M. (2000). The Quarterly Journal of Economics, 115(1), 147-180. The authors hypothesize the causation of post-Vietnam War United States economy, focusing on accommodating monetary policy.  The author’s uncover differences between the Volcker’s appointment as a federal chair in 1979. The author’s zeroed in on the interest rate policies from the Volcker-Greenspan period. Comparing the implications of the accommodating monetary policy, the authors find the  Volcker-Greenspan rule as stabilizing.
  • Optimal commitment in monetary policy: credibility versus flexibility, Lohmann, S. (1992). The American Economic Review, 82(1), 273-286.Through a literature review, the author examines the time-consistently paradigm in implementing accommodating monetary policy. Lohmann focuses on optimal commitment, looking at if it is better to choose credibility or flexibility.
  • Monetary policy rules in practice: Some international evidence, Clarida, R., Galı, J., & Gertler, M. (1998). european economic review, 42(6), 1033-1067. The authors examine the estimates for monetary policy reactions for two sets of countries.  The authors find that G3 countries (Germany, Japan, US) use an implicit form of inflation targeting with a forward-looking approach. The E3 counties (UK, France, and Italy) have followed Germany since 1979. Looking at the E3 countries’ economic collapse, the authors conclude that inflation targeting is optimal.
  • Opening remarks: monetary policy since the onset of the crisis, Bernanke, B. S. (2012, August). In Proceedings: Economic Policy Symposium Jackson Hole (pp. 1-22). A contemporary article, Bernanke evaluates the United State’s accommodating monetary policy. The study primarily scrutinizes the way in which the United States Federal Reserve utilized nontraditional fiscal policies in response to the recession. Bernanke attempts to ascertain if the decisions of the Federal Reserve provided a stabilizing effect on the economy.
  • Monetary policy, capital controls and seigniorage in an open economy, Drazen, A. (1989). A European central bank, 13-32. Drazen analyzes historical data regarding monetary policy. The study focuses on the differences in fiscal policy in West Germany and the rest of Europe.
  • Monetary policy in a downturn: are financial crises special?, Bech, M. L., Gambacorta, L., & Kharroubi, E. (2014), International Finance, 17(1), 99-119. The authors examine the efficiency of accommodative monetary practices. Using a study of historical data, the compiled research shows that fiscal reactive policy is effective following the economic crisis. The data suggests that accommodative monetary policy is difficult to achieve, but that the private sector can help induce a stronger recovery.
  • A historical analysis of monetary policy rules, Taylor, J. B. (1999). In Monetary policy rules (pp. 319-348). University of Chicago Press. This article examines the fiscal history of the United States from the view of recent research on accommodating monetary policy. Taylor examines the complex relationship between politics and economics in the history of the United States. Furthermore, Taylor looks to quantify mistakes of past federal policies and provide implications for further policy changes.
  • US unconventional monetary policy and transmission to emerging market economies, Bowman, D., Londono, J. M., & Sapriza, H. (2015). Journal of International Money and Finance, 55, 27-59. The scholars analyze the effects of the United States unconventional monetary policies on the global market. The study examines how these policies affect specific countries and their economies respond. The data analysis proved the hypothesis that the responses were not outsized with a model that took other considerations into account.
  • Risk, uncertainty and monetary policy, Bekaert, G., Hoerova, M., & Duca, M. L. (2013). Journal of Monetary Economics, 60(7), 771-788. The researchers analyzed the stock market’s expectation of volatility via the VIX closing. The study found that lax monetary policy decreases both risk aversion and uncertainty. The hypothesis was proven through both a model and an analysis of high-frequency data.

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