Monetary Policy

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 the central bank’s control of supply of money as an instrument for achieving the objectives of general economic policy.”

Nature 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 money

Monetary policy works through

expansion or contraction of

investment and consumption

expenditure.

Objectives of Monetary Policy….

There are basically three

major objectives of

monetary Policy. Which are:-

To ensure price stability.

To encourage economic

growth.

To ensure stability of exchange

rate of money.

Scope of Monetary Policy….

Monetary decisions today take into account a widen

range 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,

Importance of Monetary

Policy……

Regulates 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.

6

Tools 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.

Expansionary Monetary Policy…

The following three monetary policy

measures are adopted as a part of an

expansionary monetary policy to cure

recession & to establish the

equilibrium of national income at

full employment level of output.

The central bank undertakes open market

operation

The central may lower the bank rate

The central bank may reduce cash reserve

ratio

Tight Monetary Policy…The following monetary measures

generally adopted as tight monetary

policy to control inflation

The central bank sells the Government

securities

The central bank may raise bank rate

The central may raise statutory cash reserve

ratio

MONETARY POLICY :KEYNESIAN VIEW

EXPANSIONARY MONETARY POLICY TIGHT MONETARY POLICY

Problems : Recession & Unemployment

Measures :

1. Central bank buys securities through

open market operation

2. It reduces CRR

3. It lowers bank rate

Problem : Inflation

Measures :

1. Central bank sells securities through

open market operation

2. It raises CRR & SLR bank rate

3. It 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 falls

Role of Monetary Policy in Economic Growth….

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.

Monetary Policy in Bangladesh……

As stated in Bangladesh Bank order 1972,the principal objectives of country’s 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 country’s productive resources in the best national interest.

Limitations of Monetary Policy in

developing Countries

In 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 can’t 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.

THANK YOU