Monetary policy design changes as per the goals set for the monetary policy and the emerging economic scenario.
The monetary policy is characterised as expansionary policy, contractionary policy, counter cyclical policy, rule based policy or discretionary policy.
Expansionary Monetary Policy
Expansionary or easy monetary policy aims at encouraging spending on goods and services by expanding the supply of credit and money by lowering the policy rates (bank rate or repo rate), lowering the reserve requirements and purchasing the government securities from the market.
Contractionary Monetary Policy
Contractionary or tight monetary policy aims at preventing inflation by contracting the money supply.
Contraction in money supply is achieved by increasing the policy rates, increasing the reserve requirements and purchasing the government securities from the market.
Countercyclical Monetary Policy
Countercyclical policy aims at moderating the cyclical fluctuations in the economy and stabilizing the economy around its trend path by following countercyclical measures.
Rule Based Monetary Policy
Under rule based policy money supply and related variables are controlled by predetermined rules, norms and standards.
The central bank authorities cannot use their discretion to change the values of these variables.
Discretionary Monetary Policy
Discretionary Monetary Policy allows the central bank greater autonomy in the conduct of monetary policy.
Under such a policy rather than getting constrained by the pre-set rule, the central banks, after assessing the emerging economic scenario and using its own judgment, can change the values of money supply and the related variables.