Theories Related to Monetary Policy and Its Adjustment

Monetary policy is a collection of policies to control the money supply implemented by a country’s government or central bank to achieve set economic development targets, and achieve the goals of stabilizing prices, full employment and promoting economic growth by regulating intermediate variable tools such as the intermediary interest rate, the monetary base, and the rate of inflation. Since the ultimate means of operation of monetary policy is mainly to regulate the money supply, the impact and objectives of monetary policy are different in the short and long run: In the short run, changes in the money supply have a direct impact on nominal variables, thus increasing short-term inflation and output growth; in the long run, monetary policy has no impact on real variables, which is manifested as the long-term neutrality of policy. The difference between long-term and short-term effects poses a challenge to the central bank’s choice of policy objectives. Generally speaking, monetary policy should take stable nominal variables, such as output growth, inflation and employment as its short-term objectives, and price stability as its long-term objective (Peter Bofinger 2013). Judging from U.S. monetary policy adjustments during the period from World War II to the subprime mortgage crisis, the Fed’s policy behavior is consistent with these objectives (Cogley and Sargent, Review of Economic Dynamics 8:262–302, 2005).