MCI stands for Monetary Conditions Index. In today’s blog article we are going to discuss what the MCI is and what it means in the economy.
MCI Definition
The MCI is a number calculated from the weighted average changes in short-term interest rates and exchange rates compared to values from a base period. The MCI is a tool used by some countries like Canada, New Zealand, and Norway for designing and implementing banking policy.
What Does the MCI Indicate and How Is It Used?
The calculated MCI—along with other tools—shows banks a number of things including the “tightness” or “looseness” of money in the economy. Banks, in general, want to keep the economy healthy. So, for example, in a climate of rising interest rates, banks implement policy to keep the interest rates from rising or changing too quickly.
MCI guides monetary policy in that when the economy is healthier or when interest rates are low or lowering and/or the country’s currency is strong, then government are more likely to increase spending. In contrast, when the economy is less healthy and money is “tight” then government spending and borrowing typically decreases.
The purpose of these monetary policies is to promote growth within a country (for example, GDP and GNP) and reduce poverty. Monetary policies also try to make any changes to interest rates slow and gradual so as not to shock the economy or stock market.
This is a very large and complex subject. Banks influence the money supply with adjustments to interest rates, buying and selling government securities, and investing in foreign currency. Governments influence the money supply by increasing or decreasing taxes, spending more or less, and borrowing more or less (in theory, anyway). Think of MCI as a barometer of the relative health of a country’s economy.
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