Editing Macroeconomics (section)

===Monetary policy===
{{Further|Monetary policy}}

[[Central bank]]s conduct monetary policy mainly by adjusting short-term [[interest rates]].<ref name=RBA>{{cite web |last1=Baker |first1=Nick |last2=Rafter |first2=Sally |title=An International Perspective on Monetary Policy Implementation Systems {{!}} Bulletin – June 2022 |url=https://www.rba.gov.au/publications/bulletin/2022/jun/an-international-perspective-on-monetary-policy-implementation-systems.html |publisher=Reserve Bank of Australia |access-date=13 August 2023 |language=en-AU |date=16 June 2022}}</ref> The actual method through which the interest rate is changed differs from central bank to central bank, but typically the implementation happens either directly via administratively changing the central bank's own offered interest rates or indirectly via [[open market operations]].<ref>{{cite book |title=MC Compendium Monetary policy frameworks and central bank market operations |date=October 2019 |publisher=Bank for International Settlements |isbn=978-92-9259-298-1 |url=https://www.bis.org/publ/mc_compendium.pdf}}</ref>

Via the [[monetary transmission mechanism]], interest rate changes affect [[investment (macroeconomics)|investment]], [[Consumption (economics)|consumption]], [[asset prices]] like listed companies' shares prices and [[Real estate appraisal|house prices]], and through [[exchange rate]] reactions [[export]] and [[import]]. In this way [[aggregate demand]], [[employment]] and ultimately inflation is affected.<ref name="Fed goals II">{{cite web |title=Federal Reserve Board - Monetary Policy: What Are Its Goals? How Does It Work? |url=https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm |website=Board of Governors of the Federal Reserve System |access-date=13 August 2023 |language=en |date=29 July 2021}}</ref> Expansionary monetary policy lowers interest rates, increasing economic activity, whereas contractionary monetary policy raises interest rates. In the case of a fixed exchange rate system, interest rate decisions together with direct intervention by central banks on exchange rate dynamics are major tools to control the exchange rate.<ref name=nationalbanken>{{cite web |title=Fixed exchange rate policy |url=https://www.nationalbanken.dk/en/frequently-asked-questions/fixed-exchange-rate-policy |website=Nationalbanken |access-date=13 August 2023 |language=en}}</ref>

In developed countries, most central banks follow [[inflation targeting]], focusing on keeping medium-term inflation close to an explicit target, say 2%, or within an explicit range. This includes the [[Federal Reserve]] and the [[European Central Bank]], which are generally considered to follow a strategy very close to inflation targeting, even though they do not officially label themselves as inflation targeters.<ref name=Holdingline>{{cite web |title=Inflation Targeting: Holding the Line |url=https://www.imf.org/external/pubs/ft/fandd/basics/72-inflation-targeting.htm |website=International Monetary Fund |access-date=12 August 2023}}</ref> In practice, an official inflation targeting often leaves room for the central bank to also help stabilize [[Output (economics)|output]] and employment, a strategy known as "flexible inflation targeting".<ref>{{cite web |last1=Ingves |first1=Stefan |title=Flexible inflation targeting in theory and practice |url=https://www.bis.org/review/r110517c.pdf |website=www.bis.org |publisher=Bank of International Settlements |date=12 May 2011 |access-date=5 September 2023}}</ref> Most [[emerging economies]] focus their monetary policy on maintaining a [[fixed exchange rate]] regime, aligning their currency with one or more foreign currencies, typically the [[US dollar]] or the [[euro]].<ref name=IMF>{{cite book |last1=Department |first1=International Monetary Fund Monetary and Capital Markets |title=Annual Report on Exchange Arrangements and Exchange Restrictions 2022 |date=26 July 2023 |publisher=International Monetary Fund |isbn=979-8-4002-3526-9 |url=https://www.elibrary.imf.org/display/book/9798400235269/9798400235269.xml?code=imf.org |access-date=12 August 2023 |language=en }}</ref>

Conventional monetary policy can be ineffective in situations such as a [[liquidity trap]]. When nominal interest rates are near zero, central banks cannot loosen monetary policy through conventional means. In that situation, they may use unconventional monetary policy such as [[quantitative easing]] to help stabilize output. Quantity easing can be implemented by buying not only government bonds, but also other assets such as corporate bonds, stocks, and other securities. This allows lower interest rates for a broader class of assets beyond government bonds. A similar strategy is to lower long-term interest rates by buying long-term bonds and selling short-term bonds to create a flat [[yield curve]], known in the US as [[Operation Twist]].<ref>{{cite web |last1=Hancock |first1=Diana |last2=Passmore |first2=Wayne |title=How the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates |url=https://www.federalreserve.gov/pubs/feds/2014/201412/201412pap.pdf |website=www.federalreserve.gov |publisher=Federal Reserve |access-date=5 September 2023 |date=2014}}</ref>