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Dove (Economic Policy)

An advisor whose focus lies more on the development and support of monetary policies that focus on the reduction of interest rates and unemployment to foster economic growth

What is Dove (Economic Policy)?

In attempts to ensure the overall economic well-being and stability of a country, there are usually economic advisors who aid in the development of monetary policies. In contrast to a hawk or monetary hawk – an economic advisor who advocates for monetary policies that focus on the reduction of inflation levels – a dove is an advisor whose focus lies more on the development and support of monetary policies that focus on the reduction of interest rates and unemployment to foster economic growth.

 

Dove (Economic Policy)

 

Doves believe that lowering interest rates promotes economic growth and lowers unemployment levels. They tend to believe that the effects of inflation are less notable in comparison to interest rates. An announcement or statement by a dove is regarded as dovish.

 

Summary

  • A dove is an advisor whose focus lies more on the development and support of monetary policies that focus on the reduction of interest rates and unemployment to foster economic growth.
  • Doves believe that lowering interest rates promotes economic growth and lowers unemployment levels.
  • Doves value the well-being of consumers and therefore strive to ensure consumer protection by establishing monetary policies that foster the increment of employment levels and lower the interest rates.
  • To understand the consumer protection that doves value, it is important to understand the impacts of high interest rates. Higher interest rates result in increased cost of borrowing, a decrease in consumer spending, and encourages saving.

 

Theories Supported by Doves

Doves value the well-being of consumers and therefore strive to ensure consumer protection by establishing monetary policies that foster the increment of employment levels and lower the interest rates. Economists, politicians, or journalists who are supportive of lowering interest rates can be known as doves. Lowered interest rates encourage consumers to seek debt and also spend more.

As demands increase, employment is created, helping promote economic growth. The growth in demand also increases the prices of commodities. Growth in employment levels can result in an increase in wages and salaries, which, in turn, increases the buying capacity. It enables them to afford higher-priced commodities. However, it may result in inflation, as the continued increase in prices and wages becomes cyclical.

 

The Impact of High Interest Rates

To understand the consumer protection that doves value, it is important to understand the impacts of high interest rates.

Higher interest rates result in an increased cost of borrowing. The high interest rates mean loans and other debt facilities become more expensive for consumers. The high cost of borrowing discourages consumers from spending and borrowing. Financing costs are higher, therefore lessening the disposable income of the individuals with outstanding loans.

In conjunction with the increase in the cost of borrowing, consumers will now face higher mortgage interest payments. It causes a notable effect on personal income, thereby impacting consumer spending. The high cost of borrowing also discourages businesses from borrowing funds to reinvest. In addition to higher costs of debt, higher interest rates encourage consumers to save more, instead of spending. Higher interest rates make savings and long-term deposits attractive, as such instruments will earn interest.

On a macroeconomic level, higher interest rates moderate economic growth and suppress demand, which reduces the pressure that comes with inflation. It can positively impact the value of a currency, i.e., the value of the currency increases. Moreover, the growing interest rates affect both businesses and consumers; thus, reductions in investments and consumption are likely to occur in a rising interest rate environment.

Furthermore, government debt expenditure also increases in a high-interest-rate environment. The high interest rates indicate higher interest payments on government debt. Also, it can potentially result in increased taxes. Hence, the impact of higher interest rates can be summarized by noting that the increment reduces consumer spending and investments, therefore decreasing aggregate demand.

 

The Impact of Decreased Aggregate Demand

Lowered aggregate demand tends to result in lowered economic growth, which could lead to a recession (in some cases). Also, reduced aggregate demand results in lower production levels, thereby reducing the number of workers needed by production or service-offering companies. It results in higher unemployment levels.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Aggregate Supply and Demand
  • Expansionary Policy
  • Fiscal Policy
  • Inflation Targeting

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