Expanded Summary

State policies influence  the environment, where business has to operate. The perspectives of economical development greatly depend on the quality of this environment. Among these policies is the monetary policy, which is created and performed by the central bank of the country. From the point of view of influence on economy, among other policies of the government, the monetary policy is the most viable mechanism, which is quickly corrected in response to the expected changes of the macroeconomic situation.

The result of the expansive monetary policies, which where implemented in many countries, was high inflation. In this regard, especially outstanding were 70-80-ies. In this period in many countries, including economically developed, the inflation reached double-digit indicators. One positive result of this prolonged inflation was that recognition of the loss received as a result of inflation became almost universal.

This influenced the monetary policies and the aim of reducing inflation was brought to front.  Many countries developed and implemented goal-oriented inflation monetary policies.  The monetary policy consists of several components and its success depends on proper and synchronized action of these components. Besides, political factors can have great influence on it, which sometimes may be negative. So the structure and organization of the monetary policy must be such that decisions of the policy must be protected from possible negative influenceas much as practical.

The monetary policy focused on inflation, which means stability of prices, complies with the interests of the growth of the countryas much as practical, as low inflation with minimal volatility creates good conditions for making efficient economic and investing decisions. Sustainably  low inflation reduces market and investment risks. 

The monetary policy should not be discretional and should respond prior to its occurrence. The processes results are characterized by time lag, so the decisions of the monetary policy must be  preemptive and respond to the events, whose occurrence is expected in the future. So, the necessary instrument of the efficient monetary policy is prediction, which shall be based on the documented and verified methodology of prediction.

With the objective of increase of accountability and responsibility of the central bank, it is preferred that the aim of the monetary policy to be urgency, whose length may be one year or more. The average term of the objective increases the flexibility of monetary policy. In case of short-term shocks, it is possible to allow short-term deviation from the aim within certain framework. In determination of the term of the goal, the speed of mechanisms for the transfer of instruments of the monetary policy must be taken into account. In developing countries the inflation responds comparatively quickly to the rate of the monetary policy, so one year is often taken as the duration of the goal. Accurate determination of the term of the mechanism increases the efficiency of accountability of the central bank and reduces the possibility of creation of inflation expectation.

The consumer price index (CPI) is often used for the measurement of the target inflation. The usage of this indicator is justified by the fact that it is calculated and published on a monthly basis. It is known, that volatility of the prices of the part of products participating in the calculation of CPI is less dependent on the rate of the monetary policy, so the official CPI will require certain correction.

The part of fluctuation, which is caused by other factors-for example, seasonality and irregularity must be eliminated.

One more characteristic of determination of the goal is quantitativeness, which may be selective or intervallic. The advantage of the selective is that it restricts deflation. In both cases, the market is provided with clear and exact sign about the decision of the central bank. It is justified to mitigate the selective dedicated level, which may be achieved by determination of tolerance of deviation from it, which will have a positive impact on the flexibility of the monetary policy.

In relation tothe goals of the monetary policy, the mode of currency exchange rate is one more important issue. The central bank, focused even on one inflation goal, cannot avoid responsibility for the exchange rate. The sharp devaluation of the currency, especially in the developing countries, gives an impetus to inflation and sometimes causes financial crisis. The level of risk depends on the level of development of economy-how quickly and efficiently it can replace import with the local production and increase export. Some of these factors are beyond the monetary policy, because long “underpin” of the currency exchange rate is achievable only by means of instruments available to the central bank of the country.

The central bank can and must mitigate “sharp” short-term fluctuation of the currency exchange rate. But it is not easy. Thus one of challenges of the monetary policy oriented on the target inflation, remains the currency policy. At its best, the following questions must be answered within the framework of this policy: (1) should the currency exchange rate be fixed or free? (2) to what extent is the fluctuation of the currency exchange rate moderate? (3) how the exchange rate should be “underpinned” in the specified range of stability?

Taking into account the existing risks, the currency exchange policy of the central bank should be very careful, its aim must be only mitigation of short-term fluctuation. As to the policy of the fixed rate, it cannot be deemed to be careful, as it increases the risk of the economic collapse of the country, which had been confirmed many times by the experience of various countries.

It is true that the mode of free currency exchange rate is accompanied by the currency risk, but its other advantages justify undertaking this risk. In case of the free exchange rate, all changes shall immediately be reflected in the currency price, and the business units have the possibility to timely respond to them.

The success of the monetary policy also depends on the quality of independence of the central bank. The independence of the central bank has several dimensions: political, purposeful and instrumental. The purposefulness of political independence means to what extent the central bank is free in determination of its purpose. Purposeful independence ensures political independence, because the freedom of choosing the goal enables  central bank to make choice  without political influence on the low inflation target and follow it. By instrumental independence we should imply methodological independence. That is the freedom of selection of political instruments.

The performed research confirms that the correlation between the independence and inflation of the central bank is negative. The empirical research also confirms the following: (1) positive correlation between the independence of the central bank and economical result; (2) independence of the central bank between the inflation.

Not less important component of the monetary policy is the transparency of the central bank and efficiency of channels of communication with the society. The central bank must clearly  explainthe goals of the monetary policy and the plans for the achievement of those goals. Besides, it is important to timely disclose current changes in the monetary policy. The aim of communication must be restriction of the possibility of uncertainty and creation of unnecessary expectation.

The central bank must have the means for the prediction of those changes,  which are influenced by the instruments of the monetary policy. The skill of prediction assists the central bank in timely making decisions and reduces the risk of incompliance of their decisions with the time. On the other hand, when the society understands the goal of the current decisions, the implementation of the monetary policy is significantly simplified for the central bank