Monetary stimulus refers to changes in a monetary policy designed to increase the money supply. Among the options are cutting policy rates, open market operations by buying government securities, and lowering the reserve requirement ratio.
The stimulus is a part of the economic stimulus package. The other part is fiscal stimulus, which involves reducing taxes and increasing government spending.
Impacts of monetary stimulus
Monetary stimulus stimulates aggregate demand. Through the money creation process, the policy increases the money supply. Because of more money in the economy, liquidity increases and encourages a low-interest-rate environment.
Low-interest rates should stimulate the consumption of goods and services by households. Likewise, as investment costs become cheaper, businesses start to order capital goods, exceptionally light equipment.
In summary, lower interest rates increase aggregate demand. The process (we call it the monetary transmission mechanism) can go through various channels such as asset price, wealth, exchange rate, lending rate, and investment spending. Increased demand stimulates businesses to produce more, driving real GDP to grow.