Money interest rate

economic-dictionary

The money interest rate is the value of money established by the politics monetary policy of a central bank in the short term and that serves as the cost of financing companies. It is therefore the most important variable in economic activity.

How does monetary policy influence?

The power to direct and execute the monetary policy of a country or an area rests with the Central Banks, which are those that determine the interest rate of money in order to correct structural imbalances such as inflation, unemployment, liquidity crisis and other imbalances that exist in an economy.

The ideal monetary policy is one that maintains optimal interest rates that allow low unemployment and control inflation. There are many abstract economic models that do not define well how this objective should be achieved, although it is true that the most important variables that affect the interest rate of money are the expectations of economic growth and all the variables that encompass gross domestic product (GDP) and price inflation expectations.

Money interest rate level

The suitability of keeping a level of money interest rates at low or high levels is difficult to define as it depends on structural changes.

  • High interest rates make it difficult to finance companies and therefore their activity and investment, this cost having an impact on the increase in unemployment and the decrease in the level of consumption.
  • Low interest rates. They increase the level of investment and exports, but they generate a significant deflation in wages combined with an increase in inflation, as companies seek to increase their profit margins.

The monetary policy objectives are different in each Central Bank, and are defined in the mandate. If we compare the European Central Bank with the Federal Reserve, we can say that the objective of the ECB is price stability, neglecting unemployment, however, the Fed takes into account both variables and they are considered very important for the design of policy monetary.

Tags:  latin america banks finance 

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