An easy money policy is a

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

that increases the

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

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, th ...

s. It occurs when a country's

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

decides to allow new cash flows into the

banking system A bank is a financial institution that accepts 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 markets. Becaus ...

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

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...

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 general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

. 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 whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...

, 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''. . Its content includes the st ...

and by

New Classical economists New is an adjective referring to something recently made, discovered, or created. New or NEW may refer to: Music * New, singer of K-pop group The Boyz Albums and EPs * ''New'' (album), by Paul McCartney, 2013 * ''New'' (EP), by Regurgitator, ...

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

Sloan School of Management The MIT Sloan School of Management (MIT Sloan or 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 programs, a ...

, which looked at the growth rate of aggregated

fixed investment Fixed investment in economics is the purchasing of newly produced fixed capital. It is measured as a flow variable – that is, as an amount per unit of time. Thus, fixed investment is the accumulation of physical assets such as machinery, land ...

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 economics {{econ-term-stub