Active and passive monetary policies are two distinct approaches that central banks use to manage the economy, particularly in influencing inflation, employment, and economic growth.
Active Monetary Policy: This approach involves taking deliberate actions to influence the economy through tools like interest rate adjustments and open market operations. Central banks adopt active policies when they believe the economy is not operating at its potential. For example, if unemployment is high or inflation is low, a central bank may lower interest rates to stimulate borrowing and spending. The aim is to respond to current economic conditions and mitigate downturns or overheating in the economy. Active monetary policy is often used in a discretionary manner, where policymakers assess the current economic situation and make changes accordingly.
Passive Monetary Policy: In contrast, passive monetary policy is characterized by a more hands-off approach. Here, central banks set their policies based on preset rules or guidelines, without constant adjustments based on current economic indicators. An example might be targeting a specific inflation rate or adhering to a long-term interest rate goal. Passive policies tend to provide stability since they are predictable, allowing businesses and consumers to make informed decisions without worrying about abrupt changes in monetary policy.
In Summary: The main difference lies in the responsiveness to economic conditions. Active monetary policy seeks to react to current economic challenges and adjust policies as needed, while passive monetary policy is more about following a consistent framework or rule, allowing the economy to self-correct.