What is a Monetary Authority?

Mary McMahon
Mary McMahon

A monetary authority is a government agency, or agencies, responsible for controlling the supply of money in a given nation. A common example is a central bank, although governments can set up their money supply in a number of ways. Sometimes, the executive branch has control over available supplies of currencies, and in other cases, multiple agencies may work together to act as a monetary authority. This agency employs economists, analysts, and policymakers to make sound decisions about fiscal policy with the goal of promoting economic health.

The Federal Reserve's monetary policies, such as decisions on interest rates can greatly influence what happens in the U.S. economy.
The Federal Reserve's monetary policies, such as decisions on interest rates can greatly influence what happens in the U.S. economy.

One aspect of the responsibilities of a monetary authority involves setting interest rates. When interest rates are low, it frees up the money supply, while high rates can tighten it down. By changing rates, authorities can indirectly shape the direction of the economy. This approach requires less intervention than other options for controlling the availability of money, and tends to be the first option the agency will pursue.

Monetary authorities can also recall currency. If there is too much money in circulation, the agency can collect currency, as well as shifting the balance of government debt instruments to keep money with the government, rather than circulating it in society. Conversely, the monetary authority can print more money, or buy up the government's own bonds to put money into the hands of investors. The investors, in turn, will find new avenues for investment, creating a ripple effect and increasing the supply of currency.

These government authorities have to strike a delicate balance in their work. If a government appears too interventionist in the management of financial matters, this may be a turn off for trade partners. Governments that do not act in time to correct obvious financial problems can also be a cause for concern, as investors may worry about their exposure to loss and other issues. The monetary authority often does work behind the scenes to shape monetary policy without direct involvement, allowing the market to correct itself and stepping in when the market is clearly heading for trouble.

The heads of a monetary authority are often government appointees. Heads of state select these individuals on the basis of their experience, as well as their approach to fiscal policy, and they often remain in place for a long time. This encourages people to think about long-term planning, rather than being worried about high turnover and seeking new positions when their terms are up. Economists are common choices, along with people who have experience in the financial industry or the government.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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