Analysis of Monetary Policy Tools on Inflation in Rwanda

Abstract

Purpose: The aim of the study was to assess the analysis of monetary policy tools on inflation in Rwanda. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The study indicated that central banks primarily use interest rates as a tool to influence inflation rates. Lowering interest rates typically stimulates borrowing and spending, thus boosting economic activity and potentially leading to higher inflation. Conversely, raising interest rates can dampen economic growth and reduce inflationary pressures. Additionally, central banks may employ unconventional monetary policy measures such as quantitative easing (QE) or asset purchases to further influence inflation. QE involves purchasing government bonds or other assets to inject liquidity into the financial system, aiming to lower long-term interest rates and encourage lending and investment. The effectiveness of these monetary policy tools in impacting inflation depends on various factors, including the state of the economy, inflation expectations, and external shocks such as oil price fluctuations or geopolitical events. Moreover, the transmission mechanism through which monetary policy affects inflation can vary, with lags in implementation and effectiveness requiring careful consideration by policymakers. Overall, the analysis underscores the complex and multifaceted nature of monetary policy's impact on inflation, highlighting the need for a nuanced approach that considers both short-term economic conditions and long-term inflation expectations. Implications to Theory, Practice and Policy: Quantity theory of money, monetarism and new keynesian phillips curve may be used to anchor future studies on assessing the analysis of monetary policy tools on inflation in Rwanda. Conducting targeted studies on specific industries heavily reliant on immigrant labor, such as agriculture, healthcare, and technology, is essential for providing actionable insights. Designing immigration policies that are flexible and responsive to labor market demands is crucial for addressing economic needs effectively.