Monetary policy refers to the actions and tools employed by a central bank, such as the US Federal Reserve, the European Central Bank, or the Bank of England, to regulate the money supply, interest rates, and credit conditions in an economy.

The main objectives include achieving macroeconomic stability through price stability, full employment, and sustainable economic growth.

Central banks implement two primary types of monetary policy:

• Expansionary monetary policy: Measures to increase the money supply and credit, often by cutting interest rates or buying government securities (e.g., quantitative easing). This stimulates economic activity and reduces unemployment by encouraging borrowing and spending.
• Contractionary monetary policy: Actions to reduce the money supply and credit, typically by raising interest rates or selling government securities. This curbs inflation by discouraging excessive borrowing and spending.