Some of the objectives of monetary policy seem to be conflicting and mutually contradictory
- Full Employment and Balance of Payment Equilibrium – Similarly while maximizing domestic employment and economic growth, a balance of payment deficit is bound to emerge. With the rise of domestic income, imports increase fast hence expansionary monetary policy will create inflation and exports will decrease. In this case, the balance of payment equilibrium will be disturbed.
- Full Employment and Economic Growth – The objective of full employment and economic growth will be found to be conflicting. Full employment is a static concept while economic growth is a dynamic one. Full employment is concerned with raising output to the level of production possibility frontier, whereas economic growth concerns itself with the raising of production.
If full employment increase income and imports and result in a balance of payment disequilibrium the measure adopted to correct it may work against economic growth. There is also some conflict between exchange stability, price stability and economic growth. In the initial stages of economic development, imports increase whereas exports are static.
This results in exchange rate instability. Artificially raising the exchange rate will worsen the balance of payment positions and slow down the rate of economic growth
- Price Stability and Economic Growth – In the period of growth some price rise or inflation is inevitable. Additional money has to be injected into circulation to finance development projects.
This results in a price rise. Inflation which is mild at first becomes higher after some time presetting an obstacle to economic growth thus price stability and economic growth are not compatible objectives.
- Price Stability and Full Employment – Economists argue that full employment can only be improved under conditions of price wage stability. The Philips curve gives a negative relationship between inflation and unemployment. Therefore, some tradeoff between unemployment and inflation needs to be found. Price stability and full employment are conflicting objectives.