A:

A government might change its monetary policy for a number of reasons, some of them political, some theoretical, some empirical and some technological. The economic goals of most governments are similar: increased growth, shortened recessions, job creation and price stability. Unfortunately monetary policy is a rough and uncertain tool, often applied with best guesses and evaluated with distant and mixed results.

It is nearly impossible to divorce economic thinking from political considerations, which is why many contemporary governments attempt to separate their elected executives from monetary policy decisions. Strictly speaking, the U.S. government does not control the monetary policy of the Federal Reserve; it is technically incorrect to say the U.S. government changes monetary policy. The Fed is controlled by its Board of Governors, which operates independent of the president and U.S. Congress.

The field of economics, despite its mathematical prowess, does not have the benefit of the controlled, testable experimentation of physics or chemistry. This means the prevailing economic thought of public policymakers changes over time without concrete certainty. This is seen in the transitions between mercantilism, classical economics, Keynesian, monetarism and debt-heavy mixed economies. Monetary policy tactics might shift because a new theory has taken hold of the central bank, causing widespread economic reform.

In a more practical light, monetary policy tends to adjust to the current levels of unemployment and inflation. The proponents of monetary policy believe their tools can help guide economic activity. This takes the form of interest rate adjustments, banking reserve requirements and direct money supply manipulation. When unemployment or deflation surface, central banks pursue expansionary/inflationary monetary policies; conversely, deflationary policies are enacted when it looks like prices are rising too quickly.

Sometimes monetary policy changes because prior application proves ineffective. The "liquidity trap" in the Japanese economy during the 1990s and 2000s is a famous example of monetary policy falling short of its projected impacts. Despite years of near-zero interest rates and other expansionary methods, the Japanese central bank was unable to generate its targeted levels of inflation or economic growth. Both Japan's monetary and fiscal policy changed several times during and after this period, each alteration a byproduct of past inefficacy.

The nature of monetary policy techniques has adapted with changing conditions within the economy. Over the course of the 20th century, the Federal Reserve abandoned more classic monetary aggregates and began to focus on interest rates and bond purchase programs. Its explanation for these shifts was that changing financial instruments and electronic banking made tracking real money supply more difficult. It simply became too difficult to predict the impact of classic monetary injections in this new age.

Most of these variables are likely to be at play whenever monetary policy changes. Even with governments that have a greater degree of control over their central banks, policy changes are seldom made in a vacuum based on one consideration.

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