Monetary policy (theoritical)

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A Short Powerpoint Presentation on Monetary Policy.

Transcript of Monetary policy (theoritical)

  • 1. Welcome tothe presentation

2. Monetary Policy 3. Group Name : E 4. What 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 thecentral banks control of supply ofmoney as an instrument forachieving the objectives of generaleconomic policy. 5. Nature of Monetary Policy. Monetary policy uses a variety oftools (interest rate) to controlinfluence outcome like(economicgrowth , inflation, exchange ratewith other currencies andunemployment). It controls the supply of money Monetary policy works throughexpansion or contraction ofinvestment and consumptionexpenditure. 6. Objectives of Monetary Policy.There are basically three majorobjectives ofmonetary Policy. Which are:- To ensure price stability. To encourage economic growth. To ensure stability of exchange rate ofmoney. 7. Scope 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, 8. Importance of MonetaryPolicy Regulates currencies and reserves. Manages the monetary and thecredit system. Maintains the par value of domesticcurrencies. Promotes and maintains a high levelof production , employment andeconomic growth. Ensures balance of equilibrium. Creates full employment. Regulates neutrality of money. Ensures equal income distribution.8 9. Tools of Monetary Policy.There are four basic tools or instruments ofmonetary policy which can be used to achieveeconomic & price stability by influencing aggregatedemand or spending in the economy .These tools are:- Open market operation. Changing the bank rate. Changing the cash reserve ratio. Undertaking selective credit controls. 10. Expansionary Monetary PolicyThe following three monetary policymeasures are adopted as a part of anexpansionary monetary policy to curerecession & to establish theequilibrium of national income atfull employment level of output. The central bank undertakes open marketoperation The central may lower the bank rate The central bank may reduce cash reserveratio 11. Tight Monetary PolicyThe following monetary measuresgenerally adopted as tight monetarypolicy to control inflation The central bank sells the Governmentsecurities The central bank may raise bank rate The central may raise statutory cash reserveratio 12. MONETARY POLICY :KEYNESIAN VIEWEXPANSIONARY MONETARY POLICY TIGHT MONETARY POLICYProblems : Recession & UnemploymentProblem : InflationMeasures : Measures : 1. Central bank buys securities through1. Central bank sells securities throughopen market operationopen market operation 2. It reduces CRR2. It raises CRR & SLR bank rate 3. It lowers bank rate 3. It raises maximum margin against holding of stocks of goodsMoney supply increaseMoney supply decrease Interest rate fallsInterest rate decrease Investment increaseInvestment expenditure declines Aggregate demand increaseAggregate demand declinesAggregate output increase price level falls 13. Role of Monetary Policy in EconomicGrowth.Economic growth can be speeded up by accelerating the rate of savings and investment in the 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. 14. Monetary Policy in BangladeshAs stated in Bangladesh Bank order 1972,theprincipal objectives of countrys monetarypolicy are:- To regulate currency & reserves, To manage the monetary and credit system, To reserve the par value of domesticcurrency, To promote and maintain a high level ofproduction , employment and real income, To foster growth & development of thecountrys productive resources in the bestnational interest. 15. Limitations of Monetary Policy indeveloping 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. 16. THANK YOU