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Overview

Time lags

There are time lags to the reaction to interest rate changes in the economy. This can make the effectiveness of monetary policy less certain or even destabilising for the economy.

Other factors

Economic activity is not totally and only dependent on interest rates. Other factors, such as consumer and business confidence levels, have an impact on gross domestic product.

Conflicts with other objectives

Some economists argue that the use of monetary policy can be counter productive because it restricts economic activity and discourages foreign direct investment in the country.



For example, higher interest rates (used to combat inflation) can conflict with other macroeconomic objectives, especially with economic growth and employment

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Limitations of monetary policy

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