Redefining Monetary Policy

Monetary policy is the process by which the central bank targets economic measures such as inflation, unemployment and GDP in order to optimize the performance of the economy. This is mainly performed through controlling the supply of the money it creates, targeting interest rates, lending and asset purchases or sales.

Actions such as direct transfers of money to people are considered fiscal policy and not monetary policy under the conventional definition. Transfers to the public by central banks would better be defined as monetary policy if the monetary authority is creating new money and issuing it to people directly. If a transfer is fiscal then an asset purchase must also be fiscal because when purchasing an asset money needs to be transferred to the asset seller. Therefore a transfer may be fiscal or monetary policy depending on who performs it. If the transfer money was initially sourced from government taxation or borrowing then it is fiscal policy. If the transfer was directly performed by the central bank and the funds where created by the central bank then this constitutes monetary policy.

In an unprecedented instance where temporary contractions of the monetary base are inadequate and the central bank has to permanently contract the money supply through directly imposing transaction costs/taxes these should also be termed monetary policy. If the purpose of the policy is to remove money from circulation and this policy is performed by the monetary authority then it is monetary not fiscal even if this involves taxation. The central bank could levy transaction costs or any type of tax if it had authority use the taxation office as its collection agent just as the executive arm of government.

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