An easy money policy is a

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

that increases the

money supply In macroeconomics, money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation (i ...

usually by lowering

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

s. It occurs when a country's

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

decides to allow new cash flows into the

banking system A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

. Since interest rates are lower, it is easier for banks and lenders to loan money, thus likely leading to increased

economic growth In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...

Effects

The most immediate effect of easy money, if implemented when the economy is below capacity, may be increased economic growth. In addition, the value of

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

rises in the short term. If prolonged, the policy affects the business sentiment of firms and can reverse course over fears of rampant

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

. This is an effect of forward-looking expectations.

Criticism

As a policy, easy money underpins the economic thought of

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes ( ; 5 June 1883 – 21 April 1946), was an English economist and philosopher whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originall ...

, and has been criticized by advocates of

public choice theory Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science." Gordon Tullock, 9872008, "public choice," '' The New Palgrave Dictionary of Economics''. . It includes the study of ...

and by

New Classical economists New or NEW may refer to: Music * New, singer of K-pop group The Boyz * ''New'' (album), by Paul McCartney, 2013 ** "New" (Paul McCartney song), 2013 * ''New'' (EP), by Regurgitator, 1995 * "New" (Daya song), 2017 * "New" (No Doubt song), 1 ...

. A study conducted by S.P. Kothari of the

MIT Sloan School of Management The MIT Sloan School of Management (branded as MIT Sloan) is the business school of the Massachusetts Institute of Technology, a private university in Cambridge, Massachusetts. MIT Sloan offers bachelor's, master's, and doctoral degree progra ...

, which looked at the growth rate of aggregated

fixed investment Fixed investment in economics is the purchase of newly produced physical asset, or, fixed capital. It is measured as a flow variable – that is, as an amount per unit of time. Thus, fixed investment is the sum of physical assets such as machin ...

by American companies between 1952 and 2010 found little evidence to support the notion that lowering short term interest rates stimulates corporate investment. His findings illustrate why reducing the Fed's policy of keeping low interest rates has not had the desired effect. Retrieved on May 5, 2014

References

Monetary policy {{econ-term-stub

Effects

Criticism

See also

References