Monetary Dove

Posted in Finance, Accounting and Economics Terms, Total Reads: 486
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Definition: Monetary Dove

A monetary dove or simply dove refers to the class of economists who believe that low interest rates are beneficial for the economy and occasional rise in inflation above a normal rate should not bother much. An inflation rate of 2% is considered normal and doves believe that increase in inflation above this normal rate is a price worth paying for the increase in jobs and economic growth that it brings in.


In other ways we can say that they are in favour of monetary expansion policy and thus lowering increase rates. They are also mostly in favour of Quantitative easing as they believe that monetary expansion can do wonders and create jobs and stimulate the economy. They tend to underestimate effects of inflation on the economy and overestimate the capability of monetary policy to create employment and hence see more need for monetary expansion.


Advantages of having Low interest rates:

1. Business investments pick up and economic activity increases

2. Helps stimulate household expenditures on consumer and durable goods, automobiles and housing

3. Improves Bank balance sheets and increases their capacity to lend. By keeping interest rates low, the banking system is recapitalised by increasing the Net Interest Margin of the industry and thus increasing Retained Earnings and thus its capital.

4. Purchase of goods and services and assets thus improving the demand and raises asset prices and overall wealth is increased.

5. Increase in demand and cheaper credit induces corporations to expand operations and attract entrepreneurs thus creating more jobs and thus addressing a key social issue unemployment


Disadvantages of low interest rates:

1. Risk of inflation increasing beyond acceptable levels

2. Encourage excess borrowing and raise debt levels

3. Incentive to spending rather than saving

4. Since the returns have become very low, those desiring higher returns will move to more speculative and high yield investments

5. Overinvestments in assets and expansions though the demand may remain low

6. Sustained low interest rates may create a deflationary environment. Eg: Japan

 

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