Essay on Monetary Policy and Economic Growth

Abstract

The global economic crisis has led to the global reduction in credit activity, a fall of domestic product as well as the level of foreign direct investments, and has imposed the sources of economic growth as one of the key problems. Therefore, the objective of this paper is the monetary policy review and the task is to research the circumstances when it is possible for the money supply to become the source of economic growth without inflationary consequences. The paper analyzes the demand and supply functions for money, the quantity theory of money, velocity of circulation and instruments of monetary policy and strives to propose such a combination of meas- ures of a new economic policy based on theoretical arguments that will stimulate economic growth. This aim requires a completely new approach to the mechanism of money creation and selection of mon- etary instruments, proposing the money supply connection to the growth of real GDP, the money supply control as the key instrument, and a low and stable long-term interest rate as the factor for main- taining stability of velocity. In such case, monetary policy will have a real impact on economic growth, even in the long run.

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