Central Bank Monetary Policy: Regulation and Imbalances

Regulation of Circulation Through the Central Bank

The Central Bank uses monetary policy as an instrument to achieve full employment and stability in the currency's value. It regulates operating cash through discounting and Open Market Operations.

Discounting

Discounting is the acquisition of a credit document at its current value or face value, discounted at an interest rate for the period of maturity. Rediscount is a practice of central banks issuing currency and is the discount of a document granted by commercial banks. This operation is intended to expand the money supply in line with the growth of the economy. Central banks charge a discount rate for this transaction, which can increase or decrease depending on the purpose of reducing or expanding the money supply.

Open Market Operations

Open Market Operations consist of the purchase or sale of credit instruments by the Central Bank to expand or contract the money supply and correct economic imbalances.

Monetary Imbalances

How much money does the economy require for proper functioning? In the abstract, it is impossible to determine that amount, as it depends on the specific characteristics and circumstances of each case. The goals of monetary policy are full employment and stability. Based on these objectives, the amount of money is determined, and the currency should be sufficient to ensure full employment without generating excessive inflation.

Indicators of Employment and Inflation

To determine whether the amount of money is sufficient or excessive, we resort to indicators of employment and inflation:

• Unemployment Rate: If the unemployment rate rises above the traditional 5%, this symptom alone does not indicate a lack of demand and, therefore, currency. There are types of unemployment that do not derive from the application, such as:

  • Technological unemployment
  • Fractional structural unemployment

  These arise from the substitution of labor by machines, the shifting of workers to other failing businesses, and imbalances in the combination of factors, as in the case of Chile due to overwork on capital.

  The most common cause of widespread unemployment is a lack of global demand, stemming from shortages of money. This is remedied by monetary expansion, except when unemployment comes from the other causes already stated. A diagnosis is required to determine the cause.

• Inflation: If indicators reflect inflation in the price level, a steady rise in prices, it cannot be argued with absolute certainty that there is an excess money supply. Inflation can come from costs rather than excess demand.