Traditionally, monetary policy has been regarded as a short-run policy primarily aiming at achieving the objectives of price stability and full employment. But, quite recently, the emphasis has been shifted from full employment or price stability to economic growth as the main objective of monetary policy.
The monetary policy is now no longer considered as a short-run policy of securing full-employment level free from cyclical fluctuations.
On the other hand the main objective of monetary policy now is to achieve the long-run goal of ever-increasing rate of economic growth.
In the U.S.A. Employment Act of 1946 made it obligatory on the federal government to take till possible measures not only to promote maximum employment, but also maximum production in the country. The objective of economic growth is also important from the point of view of the underdeveloped countries.
The real problem in these countries is not the short-run cyclical fluctuations in production and employment, but is one of long run structural changes aiming at creating conditions necessary for economic development.
Thus, the main objective of monetary policy is an underdeveloped country should be to play an active part in the process of economic development.
In fact, economic growth has been aptly made the primary objective of monetary policy. The following arguments can be advanced in favour of economic growth:
(i) The objective of full employment cannot possibly be achieved without raising the rate of economic growth.
(ii) Increasing the rate of economic growth is necessary if the people are to be provided with ever living standards.
(iii) Rapid economic growth is essential for the survival of the developing countries in the present competitive world.
(iv) The objective of economic growth takes into consideration the broader long-term perspective. It is concerned with economic and technological progress of the country.
(v) According to Woodworth, the objective of economic growth deserves priority because of two reasons: (a) Despite the enormous improvement in the living standards in the western world, poverty still remains the world’s burning economic problem; (b) Economic growth is an essential ingredient of the economic and political institutions.
Some economists have opposed the growth objective of monetary policy in underdeveloped countries. According to Howard Ellis, for example, any monetary policy promoting economic growth in an underdeveloped country is doomed to frustration because such countries are highly susceptible to inflationary pressures.
But, the majorities of the economists is in favour of the monetary policy having economic growth and are of the view that monetary policy should explicitly adopt economic growth as its primary objective.
Economic growth has been defined as the process whereby the real national income of a country increases over a long period of time. In this process, money can play an important role as a mobilising agent.
Most of the countries, particularly the less developed countries, possess the physical and human resources necessary for economic growth, but their resources remain un- utilized largely due to lack of necessary finances.
Under such conditions, an expansionary monetary policy, by providing necessary monetary resources, will be able to mobilise the unutilized resources and thus will activate and accelerate the process of economic growth.
The monetary policy aiming at promoting economic growth must satisfy two conditions:
(i) The monetary policy must be flexible. In other words, it must be able to establish equilibrium between aggregate demand for money and aggregate supply of goods and services.
When aggregate demand for money exceeds the aggregate supply of goods a restrictive monetary policy should be adopted.
On the contrary, when aggregate supply of goods and services exceeds aggregate monetary demand, an expansionary monetary policy should be adopted. Thus, a flexible monetary policy ensures price stabilisation which is necessary for economic growth.
(ii) The monetary policy should be able to promote capital formation. In other words, it should create favourable atmosphere for promoting saving and investment in the country. For this, the aim of the monetary policy should be to remove price fluctuations and establish reasonable price stability.