What is monetary policy?

Monetary policy is the responsibility of a nation’s government. It involves the setting of the interest rate on overnight loans in the money market. In Australia, this is done by the Reverse Bank of Australia (RBA), which places a “comprehensive set of monetary policy measures to lower funding costs and support the supply of credit to the economy”. This set of measures will impact on borrower and lender behaviour, economic activity and the inflation rate. Monetary policy can be broken down into expansionary and contractionary policies.