Effectiveness of Monetary Policy

Strengths (AO3)

• Incremental, flexible, and easily reversible: Unlike other forms of policy, changing monetary policy can be quickly done by the central bank. When they raise interest rates, for example, this is often done +0.25% at a time.

• Short time lags: Most central banks are independent of the government's politics. They were designed this way so policies can be implemented quickly without votes and bureaucracy. 

Weaknesses (AO3)

• The effectiveness of lowering interest rates decreases when close to 0: When interest rates are already very low, it is hard to lower them further. Other forms of monetary policy therefore need to be used, but they can be more expensive.

• Low consumer and business confidence: Monetary policy such as interest rates can often reduce confidence in markets such as housing, reducing consumption and investment.