What Is International Monetary Policy?

K. Kinsella
K. Kinsella
The Federal Reserve plays a large role in international monetary policy.
The Federal Reserve plays a large role in international monetary policy.

National governments and central banks from around the world attempt to control elements of the economy such as inflation and interest rates by imposing various types of monetary controls. The combined efforts of these governments and agencies are often referred to as international monetary policy. While each nation has the right to set its own economic policies, in some instances groups of nations negotiate international monetary policy agreements that affect the economies in multiple countries.

Monetary policies have an effect on the ability of importers and exporters to buy and sell goods with trading partners based in overseas locations. Some countries have minimal natural resources and people in these countries rely on foreign companies to supply valuable commodities such as oil and natural gas. High energy prices can cause an inflationary cycle to begin and when rising export prices often cause nations to fall into recession. Consequently, most national governments make economic decisions that are based upon domestic needs but also take into account the international monetary policy decisions being taken in other nations.

Central banks have the ability to lower lending rates and this means that people and businesses can borrow money inexpensively and goods become more affordable. During recessions, nations sometimes agree to lower lending rates in unison as part of a drive for a unified international monetary policy that will lower export costs and make trade between nations more affordable. Central banks often agree to raise interest rates in unison during inflationary cycles in order to limit consumer spending and drive down prices. Trade disputes often arise when differing economic conditions in two nations cause central governments to make contrasting monetary policy decisions that make international trade more difficult.

The European Union (EU) is comprised of most of the nations in Western and Central Europe and elected officials from each of these nations have the authority to make some international monetary policy decisions on behalf of the EU. Nevertheless, individual nations have the right to veto some policy decisions and some countries choose not to participate in EU economic programs. The United Kingdom and Denmark decided to opt out of the EU policy decision to introduce a single European currency. In other parts of the world such as the Americas and parts of Asia, other less formal economic groups comprised of various nations sometimes make regional international policy decisions that affect the lives of people in many nations.

Economic decisions are sometimes influenced by the International Monetary Fund (IMF) which is a United Nations (UN) agency that was created in part to facilitate international trade and commerce. The IMF has no official role in developing policies but the entity can make recommendations on policy decisions to UN member nations. Additionally, the IMF operates an emergency cash fund and economically troubled nations can obtain loans from the IMF if the organization's policy makers believe that the loans will benefit both the nation in question and the global financial scene as a whole.

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    • The Federal Reserve plays a large role in international monetary policy.
      By: qingwa
      The Federal Reserve plays a large role in international monetary policy.