What Is the Relationship between Monetary Policy and Unemployment?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 03 December 2019
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The term monetary policy is used to describe the means by which a chief monetary regulatory authority within a country tries to influence the flow of money within a specified economy through the initiation and promulgation of policies aimed at the general stabilization of the economy. In this respect, a stable rate or level of employment in the country would be one of the chief goals of the monetary authority, a task that is usually reserved for the main or central bank in that country. As such, the relationship between monetary policy and unemployment is the fact that monetary policy is utilized as a means for the regulation of the economy, something that necessarily involves the reduction of unemployment. To this end, the monetary policy may either be an expansionary one or it may be crafted to be contractionary. This link between monetary policy and unemployment is most apparent, because the expansionary monetary policy is specifically geared toward ensuring that unemployment rates are kept at the barest minimum, especially when the economy is or may soon may be in a recession.


A further analysis of the connection between monetary policy and unemployment will reveal that one of the monetary policies adopted by the apex bank within an economy under consideration to lower the rates of unemployment is a reduction of the interest rates. This is done by the regulatory bank with the intention that the reduced rate will have a ripple effect on the economy, eventually leading to hiring workers and neglecting unemployment, especially in a recession. Usually, when the chief bank reduces its interest rates, the other banks in the economy will serve as a vehicle for the implementation of the monetary policy by also reducing their own interest rates and relaxing some of their conditions for the approval of loans to individuals and businesses alike. This can be seen in the manner in which the interest rates attached to the acquisition and utilization of credit will be reduced, making it more likely that various businesses will have access to much-needed loans for expansion as well as the maintenance and growth of the business.

The link between monetary policy and unemployment here is that the ability of the businesses to gain easier access to loan and credit facilities will serve as a means for them to not only continue their operations, but to also serve as room for expansion. Where this is the case, such businesses will not have the cause to increase the rate of unemployment by laying off their workers in times of economic downturns. The contrary is the aim in the application of an expansionary monetary policy since this will serve as a means for the businesses to not only retain their employees, but to also hire more due to a likely expansion.


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