Understanding Monetary Policies in Relation to Investments

Cost Value Matrix - Arrow and TargetMonetary Policies represent the actions taken by a central bank to control the supply of money and credit available in an economy. Since the supply of money and credit available to an economy will dictate the way in which the markets within will behave, it is important for a personal investor to understand how it is that the economy will react to different monetary policies, and how it is that they combine with the other aspects of the market as a whole. Once we have that understanding, we can start to look ahead at how it is that government involvement in the markets will have an impact on our personal portfolios.

Monetary policy can be considered to be expansionary, neutral, or Contractionary. An expansionary monetary policy refers to a strategy of increasing the money supply available to markets through either increased access to credit, or direct inflation. A Contractionary policy is the exact opposite of an expansionary policy, in that it aims to slow down the growth of the economy. Lastly, a neutral policy aims to maintain a constant rate of growth in the money supply in the interests of maintaining predictability. Continue reading