5.3.2—Monetary policy tools

A central bank can change a policy interest rate, buy or sell assets, alter reserve or liquidity conditions, and use communication or targeted credit measures. The precise toolkit depends on the monetary system.

Open-market purchases can increase bank reserves and lower yields; sales can do the opposite. Forward guidance works through expectations. These tools influence spending only through financial-market and behavioural responses.

Buying government securities may lower longer-term yields and make investment finance cheaper, but the effect is limited if firms lack profitable projects or banks tighten lending standards.

The central bank does not simply “print money into every household account”, and a tool’s intended direction is not guaranteed when confidence or banks’ balance sheets constrain transmission.