One of the primary goals of all governments across the world is to ensure their nations’ inflation is low and citizens are not affected by high goods prices. However, in Venezuela, the situation is different as the inflation rate has reached a quadruple of 1369%. This is a clear indication that the cost of living in the country has gone up over at very high rates of the last few years.
Consumer Price Index is the measure of inflation. CPI measures changes in the prices of basket of services and goods that an average household consumes and weights attached to each category.

However, it is the role of Central Banks to ensure that inflation rates in their respective countries are low and do not affect the people in the countries. Central banks use monetary policy to keep the inflation rates at the desired levels. In the UK and the US, for instance, this policy is the most effective and used in maintaining low rates of inflation. In the United Kingdom, it is Monetary Policy Committee of the Bank of England’s work to set the monetary policy. In most cases, the target of the inflation rate always stands at 2% and +/-1, and the committee always uses interest rates to achieve its target.

The first step when Central Banks want to enforce the policy is by predicting the future inflation rates. These banks look at several economic data and decide whether the economy is getting to a bad point or not. If the committees in these banks predict a rise in inflation rates, they increase the interest rates. This increase will help reduce the demand within the country, and the slower growth will return the country to its original economic condition.

How exactly does increased interest rates help reduce inflation rates? Increased interest rates increase borrowing costs, hence discouraging people from borrowing and spending the money they have. Also, this increase makes it more attractive for consumers and firms to save money and reduce the disposable income of those who have mortgages. Lastly, high-interest rates increase the exchange rates value; leading to reduced exports and increased imports.
 
In the Venezuelan economy demand pull inflation could have occurred from a variety of expansionary monetary policy including central bank actions in increasing money supply “Monetary liquidity grew 14 percent in a single week of November” which lead to increased government spending so aggregate demand persistently increased at a rate that exceeds growth rate of potential GDP leading to hyperinflation which occurs when governments resort to printing money. Thereby, money loses value rapidly causing devaluation of the bolivar. This increases prices of imports and reduces the foreign price of the country’s exports leading to a price spiral and balance of payment deficit.

To control this, the government can implement price control and subsidies and allowing the use of a stronger currency (eg. the US dollar) however this will cause black marketing and no confidence in the Venezuelan currency, thus exchange controls prevent the full substitution of the bolivar with the US dollar.

Advantages and Disadvantages of the Monetary Policy
Some of the advantages of the monetary policy include the fact that it is easy to implement. Also, Central Banks never take political sides as they are always neutral. Lastly, weakening the currency of a country can boost its exports.

However, this policy has some disadvantages. They include the risk that low inflation rates may cause over-borrowing in the country, causing an economic bubble. Also, the policy may take long before it becomes effective and, lastly, keeping the interest rates low for a long time may cause a liquidity trap.