Chapter 11Monetary Policy
- The goals and objectives of monetary policy in the conventional and Islamic system.
- The instruments, channels, and impact of monetary policy in the conventional and the Islamic systems.
- The different views regarding the effectiveness and track record of discretionary monetary policy.
- The monetary policy role of commercial banks in the two systems.
- Lags in monetary policy.
- The complementary role of monetary policy to fiscal policy.
- The short-run and long-run trade-offs between inflation and employment.
- The role and monetary instruments of central banks in the conventional and the Islamic systems.
- The non-interest-bearing securities of monetary policy in the Islamic system.
- The potency and directness of monetary policy in the Islamic system.
We have seen that economies rarely operate at full employment and at capacity. Instead, economies go through periods of high unemployment and excess capacity (idle factories, machinery, and equipment) followed by periods of low unemployment and little or no excess capacity. Thus, the government tries to nudge the economy upward when there is too much excess capacity and downward when there is little or no excess capacity with rapidly rising prices. The government has two broad sets of policies—fiscal and monetary—at its disposal. In Chapter 10, we considered fiscal policy; in this chapter, we look into monetary policy.
The most important objective of monetary policy is to influence the portfolio ...