Conventional policy tools refer to the main tools used by central banks to influence the economy and achieve their policy objectives. The three main conventional policy tools are:

Interest rates: Central banks can raise or lower interest rates to influence borrowing and spending in the economy.

Open market operations: Central banks can buy or sell securities, such as government bonds, in the open market to influence the supply of money in the economy.

Reserve requirements: Central banks can alter the percentage of deposits that banks must hold in reserve, which can influence the amount of money available for lending.

These tools are called "conventional" because they have been traditionally used by central banks for many years. They are effective in managing short-term economic fluctuations, but may not be as effective in addressing longer-term structural issues.

Conventional policy tools are standard instruments central banks use to manage economic stability, primarily focusing on monetary policy. The key tools include interest rate adjustments (raising or lowering benchmark rates to influence borrowing costs), reserve requirements (mandating the cash reserves banks must hold), and open market operations (buying/selling government securities to control money supply). These tools aim to regulate inflation, employment, and economic growth by influencing liquidity and credit availability. For instance, lowering interest rates stimulates spending and investment, while raising them curbs inflation. Reserve requirements ensure banking stability and open market operations directly adjust money circulation. These mechanisms are foundational for steering economies during typical cycles, contrasting with unconventional tools (e.g., quantitative easing) used in crises.