Monetary Policy theoritical

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TopicMonetary PolicyWhat is Monetary Policy.??? Monetary Policy is the process bywhich the monetary authority of acountry controls the supply of money,often targeting the interest rate for thepurpose of promoting economic growthand stability .

According to Harry G. Johnson Monetary policy employing the central banks control of supply of money as an instrument for achieving the objectives of general economic policy.

2Nature of Monetary Policy.Monetary policy uses a variety of tools (interest rate) to control influence outcome like(economic growth , inflation, exchange rate with other currencies and unemployment).It controls the supply of moneyMonetary policy works through expansion or contraction of investment and consumption expenditure.

3Objectives of Monetary Policy.

There are basically three major objectives ofmonetary Policy. Which are:-To ensure price stability.To encourage economic growth.To ensure stability of exchange rate of money.

4Scope of Monetary Policy.

Monetary decisions today take into account a widenrange of factors such : Short term interest rates, Long term interest rates, Exchange rates, Credit quality, Bonds & equities (corporate ownership & debt) Govt. vs. Private sector spending/savings, International capital flows of money on large scale,

5Importance of Monetary PolicyRegulates currencies and reserves.Manages the monetary and the credit system.Maintains the par value of domestic currencies.Promotes and maintains a high level of production , employment and economic growth.Ensures balance of equilibrium.Creates full employment.Regulates neutrality of money.Ensures equal income distribution.

66Tools of Monetary Policy. There are four basic tools or instruments of monetary policy which can be used to achieve economic & price stability by influencing aggregate demand or spending in the economy .These tools are:-

Open market operation. Changing the bank rate. Changing the cash reserve ratio. Undertaking selective credit controls.

7Expansionary Monetary PolicyThe following three monetary policymeasures are adopted as a part of an expansionary monetary policy to curerecession & to establish theequilibrium of national income atfull employment level of output.

The central bank undertakes open market operationThe central may lower the bank rateThe central bank may reduce cash reserve ratio

8 Tight Monetary PolicyThe following monetary measuresgenerally adopted as tight monetarypolicy to control inflation

The central bank sells the Government securities The central bank may raise bank rateThe central may raise statutory cash reserve ratio

9MONETARY POLICY :KEYNESIAN VIEWEXPANSIONARY MONETARY POLICYTIGHT MONETARY POLICYProblems : Recession & UnemploymentMeasures :Central bank buys securities through open market operationIt reduces CRRIt lowers bank rateProblem : InflationMeasures : Central bank sells securities through open market operationIt raises CRR & SLR bank rateIt raises maximum margin against holding of stocks of goods Money supply increase Interest rate falls Investment increase Aggregate demand increase Aggregate output increase Money supply decrease Interest rate decrease Investment expenditure declines Aggregate demand declines price level falls10Role of Monetary Policy in Economic Growth.

Economic growth can be speeded up byaccelerating the rate of savings and investment inthe economy. This requires the following steps :

Increase in the aggregate rate of savings, Mobilization of these savings so that they are made for the purpose of investment and production, Increase in the rate of investment, Allocation of investment funds for productive purposes and priority sectors of the economy.

11 Monetary Policy in Bangladesh As stated in Bangladesh Bank order 1972,the principal objectives of countrys monetary policy are:-

To regulate currency & reserves,To manage the monetary and credit system,To reserve the par value of domestic currency,To promote and maintain a high level of production , employment and real income, To foster growth & development of the countrys productive resources in the best national interest.

12 Limitations of Monetary Policy in developing CountriesIn developing countries monetary policy suffers from the following limitations :In under developing countries, the role of monetary policy is not compulsive but permissive.In under developed society where liquidity trap is in existence cant work efficiently . Here administrative honesty & firmness are not very rigorous in less regular countries which reduce the efficiency of monetary policy a lot.Lastly the lag between the decision about a particular policy & implementation also hinders the monetary policy in success.