Economist Explains The Objectives Of Monetary Policy: Reducing Unemployment And Achieving Stability Of The Local Currency, 1 AUGUST

 Posted On2024-07-30 By Sotaliraq   Economic researcher Diaa Al-Mohsen explained the objectives of monetary policy in the country, explaining that it reduces unemployment rates and achieves stability for the local currency against foreign currencies.

Al Mohsen said, “Monetary policy is adopted to control the profit rate paid for short-term borrowing, to allow for a reduction in inflation rates or interest rates, ensuring price stability and high confidence in the value and stability of the local currency.” He noted that “monetary policy has other objectives, the most important of which may be achieving GDP stability and reducing unemployment rates.”

Al Mohsen added that “monetary policy aims to achieve stability of the local currency against foreign currencies, as the monetary authority is responsible for implementing monetary policy, which includes two types of policies that differ from each other. The first is called an expansionary policy, as it works to reduce interest rates imposed on loans.

Here, this mechanism works to increase demand for loans for investment purposes, which results in increased demand for investment goods and increased demand for goods and commodities.” He pointed out that “this mechanism works to increase demand for labor for the purpose of expanding production to meet the growing demand, as we notice here the consumer’s lack of interest in keeping cash. ‘

This policy ensures the decline of the local currency against foreign currencies, and then the foreign investor can put his money in to buy local goods at a lower price than usual, which increases demand for these goods, which increases the accelerating multiplier, which results in an increase in wages and a decrease in unemployment rates.”

“The other policy is the opposite of the first, and we call it a contractionary policy. Here, the monetary authority works to raise interest rates to withdraw the largest amount of local currency available in the market.

When interest rates are high, we find that consumers are less willing to buy goods and services. On the other hand, we find that consumers are more willing to save because interest rates are rewarding. ‘

However, this negatively affects investment, due to the high interest rates imposed on loans, which results in reducing opportunities for increased production and increasing unemployment rates. We also notice that investors are not willing to buy locally produced goods because their prices are high compared to their foreign counterparts,” Al Mohsen added.

He continued, “Monetary policy is a necessity undertaken by the monetary authority, in order to maintain the stability of the monetary system. The above is also fundamentally linked to the ability of the monetary authority to monitor the market in the cases of expansion and contraction. It is also necessary to remember the necessity of having a developed financial market.”

The problems of the banking sector and its urgent need for radical reforms in the monetary and supervisory policy of the Central Bank, and the creation of effective mechanisms to reduce corruption and ensure transparency in the management of public funds to achieve real and sustainable economic development in Iraq, are highlighted. With the ongoing dollar crisis and the absence of effective solutions, there must be a real need to establish a monetary policy that establishes the foundation for creating economic stability while preserving the country’s interests and putting an end to the US Federal Reserve’s sanctions against Iraqi banks.  LINK