How does Monetary Policy affect Inflation?

Monetary policy affects inflation in two ways. First, affecting indirectly, if monetary policy able to achieve multiplier effect, it boosts up economic activity. Initiating labor and capital markets to raise outputs beyond there capacities and creating an upward pressure on wages, thus resulting inflation to rise (that is cost-push inflation). Thus there would be a trade-off between higher inflation and lower unemployment in the short-run which further accelerate inflation. As wages and prices start to rise they are hard to bring down back, stressing the need for early policy measures to be taken.
Secondly, monetary policy can directly affect inflation via future expectations. Like if people expect the rise in prices in future, they persuade to increase in wages, which in turn affect the prices, resulting higher inflation.

Conclusion

The results show that mostly developing countries fail to attain the desired goals of monetary policy. The basic hurdles are the deep debt burdens on government, and inflation pressures. Like, Pakistan, although adopted tight monetary policy, stood at actual inflation rate of 7.7% (FY 2006-07), against the inflation target of 6.5% (in FY 07). However, the monetary policy plays effective role to control the money supply in economy in the short-run for a sustainable prosperous long-term growth of developed countries.