GOALS AND TARGETS OF MONITORY POLICY

8/2/2019 GOALS AND TARGETS OF MONITORY POLICY

1/24

By: Tayyaub khalid

GOALS OF MONITORY POLICY


2/24

Primary goal

To control money supply

By Open market operations


3/24

Goals of monitory policy

There are 5 basic goals of monetary policy

Stability in the price level (low inflation)

High employment

Economic growth

Stability in the interest rate

Stability in the exchange rate


4/24

Stability in the price level (low inflation)

Unstable prices slowdown the economic growthmake volatility in interest rates.

It increase consumption of people or household

Which effect saving of the peopleAnd make unequal distribution of wealth.


5/24

Excessive demand in not the only reason of theinflation

The other reason is the economic shock/supply

shock Like :

in the supply of a crucial material, such as oilshock which effect almost every country of the

world.


6/24

1. If monetary policy is tightened sharply

By increase in the short term interest rate by a largeamount

The inflation rate will return to target (quickly)

But economic development slowdown and create recession.2. If monitory policy does not tighten so much

Inflation rate will return to target more gradually

But there will be a smaller slowdown in real GDP.

First strategy is more effective for inflation targetachievement but not on growth rate stability

And second for the growth stability but not inflation


7/24

High employment

The second major goal for the fed. People say Promote full employment but it is not

possible

Reason:

Frictional unemployment:

Temporary unemployment of the people who seeksbetter jobs

So the appropriate goal of the policymakers is actually ahigh level of employment.

And 4% to 6% unemployment is considered as frictionalunemployment .


8/24

Economic growth

The third goal of the fed is the increase in aneconomys output of goods and services.

Related with high employment

Economy's appropriate rate of growth has to besubstantial enough to generate high employmentbut low enough toward off inflation.


9/24

Stability in the interest rate

The goal of stabilizing interest rate is directlyrelated to the goals of growth and to the fedsresponsibility for the health of the nations

financial and banking system. Note that the goal is to stabilize rate, not to

prevent changes in rates.


10/24

Stability in the exchange rate

The goal of exchange rate stability is very important forinternational trade.

high exchange rates like strong dollar, or currency having highvalue in terms of foreign currency, reduce demand for thedomestic or US made products and increase the import of

foreign goods.The result is a trade imbalance

If the domestic currency is weak then it makes inflation as USbuyers pay more for the many goods the do imports.

For these reasons:

The goal of stability in the currency market often amounts tokeeping the value of the dollar in terms of the major foreigncurrencies. Within range that is considered politically acceptableand helpful to international trading, especially exporting.


11/24

Monetary Policy Tools:


12/24

Tools:

General Controls . (Quantitative)

Selective Controls. (Qualitative)


13/24

Quantitative :

Open market operations.

Reserve requirements.

Bank rate.

Statuary liquid ratio.(SLR)

Repo rate.

Reverse repo rate.(RRR)


14/24

Qualitative:

Moral suasion.

Consumer credit control.

Direct action.


15/24

Open market operations:

Powerful tool of monetary policy.

Refers to the purchase and sale of securities by thecentral bank of the country.

Purchase/buy the government securities forexpansion of credit.(to increase supply of money)

Sale government securities for contradiction ofcredit.(to remove inflation ,to reduce supply ofmoney)


16/24

Bank Rate:

Rate at which central bank gives loans to commercial bank. Tool used by central bank for short term purposes. Dear money policy: (To control inflation)Bank rate ,lending /interest rate high ,borrowing is less

profitable result, supply of money reduces in the economy.Example:If commercial bank borrow more so increase in supply ofmoney.Near money policy:

Bank rate decrease ,interest rate decreases, borrowing moreprofitable, supply of money increases result ,expansion ofcredit.


17/24

Reserve Requirement/Ratio/Capital:

Powerful weapon. Has to keep some proportion of deposit with

central bank.

By changing the ratio Central Bank controlssupply of money.

Increase in CRR will reduce available funds forbanks for credit.(inflation reduced, supply of

money decreases) Reduction in CRR will increase available funds for

banks for credit.(supply of money increases)


18/24


19/24

Difference B/w Bank & Repo Rate:

Bank rate is a rate at which central bank lendmoney to commercial banks.

Repo rate is a rate at which commercial bank

borrow from central bank. In case of repo rate commercial banks has to sell

securities to central bank and borrow moneywhere as in case of bank rate there is no sale of

securities.


20/24

Reverse Repo Rate:

Rate which is paid/offer by central banks tocommercial banks on Deposit of funds with them.

Or Rate at which central bank borrows from other banks.

Used this tool when feels there is too much moneyfloating in banking system . If commercial bank has a surplus fund then the

deposit the funds with central bank and earn atReverse repo rate .

At higher RRR ,central bank borrow at high rate andcommercial banks prefer to deposits their money withcentral bank.


21/24

Statuary liquid ratio:

Every bank is required to maintain at the close ofbusiness every day, a minimum proportion of theirNet Demand and Time Liabilities as liquid assetsin the form of cash, gold .

Determined and maintained by central bank inorder to control the expansion of bank credit .

Central bank increase this ratio up to 40%.

An increase in SLR also restrict the banksleverage position to pump more money into theeconomy.


22/24

Moral Suasion.

Moral request by central bank to commercialbanks.

Loans should not be given for un productive fields.

Loans should not be given for speculativepurposes.


23/24

Consumer credit control.

Applied during inflation.

If the central bank want to control the supply ofmoney the central bank direction to commercial

banks. Loans should not be advanced for consumption

purposes.


24/24

Direct Action:

A policy of central bank that against commercialbanks.

Central bank will not advance loans to commercial

banks for the sectors which creates inflation.

GOALS AND TARGETS OF MONITORY POLICY

Documents

Transcript of GOALS AND TARGETS OF MONITORY POLICY