This action might not be possible to undo. Are you sure you want to continue?
Pakistan Institute of Development Economics (PIDE)
Pakistan Development Review, Vol. 45, No. 2, pp. 203-212, Summer 2006 Abstract: This paper attempts to investigate the linkage between the excess money supply growth and inflation in Pakistan and to test the validity of the monetarist stance that inflation is a monetary phenomenon. The results from the correlation analysis indicate that there is a positive association between money growth and inflation. a. The important finding from the analysis is that the excess money supply growth has been an important contributor to the rise in inflation in Pakistan during the study period, thus supporting the monetarist proposition that inflation in Pakistan is a monetary phenomenon. This may be due to the loose monetary policy adopted by the State Bank of Pakistan to show the high priority of the growth objective. The important policy implication is that inflation in Pakistan can be cured by a sufficiently tight monetary policy. The formulation of monetary policy must consider development in the real and financial sector and treat these sectors as constraints on the policy. Number of Pages in PDF File: 10 Keywords: Money Supply, Inflation, Growth, Quantity Theory, Monetary Policy, Pakistan
How Inflation is Measured There are two main indices used to measure inflation. The first is the Consumer Price Index, or the CPI . The CPI is a measure of the price of a set group of goods and services The second measure of inflation is the Producer Price Index, or the PPI . While the CPI indicates the change in the purchasing power of a consumer, the PPI measures the change in the purchasing power of the producers of those goods. The PPI measures how much producers of products are getting on the wholesale level, i.e. the price at which a good is sold to other businesses before the good is sold to a consumer. The PPI actually combines a series Causes of inflation It has been generally agreed by the economists that high rates of inflation and hyperinflation are caused by an excessive growth in the supply of money
Inflation and its impact on the Pakistan economy
Posted on June 16, 2009 by Raheem
Changes in the exchange rate and the prices of goods and services By Parveen Zaiby Inflation is the rise in the prices of goods and services in an economy over a period of time. When the general price level rises, each unit of the functional currency buys fewer goods and services; consequently, inflation is a decline in the real value of money — a loss of purchasing power in the internal medium of exchange, which is also the monetary unit of account in an economy. Inflation is a key indicator of a country and provides important insight on the state of the economy and the sound macroeconomic policies that govern it. A stable inflation not only gives a nurturing environment for economic growth, but also uplifts the poor and fixed income citizens who are the most vulnerable in society.
Definition of Monetary Policy . What are Main Objectives of Monetary Policy ? Discuss its Instruments and Technique for Credit Control .
>> NOVEMBER 13, 2009
Definition of Monetary Policy Monetary policy is that part of economic policy in which central bank controls the cost and supply of money and credit by applying different techniques. It is also main function of central bank. We all know, if supply and cost of money are not controlled. Then both are harmful for development of economy. In India RBI is sole institute who is taking steps to regulate money and credit by controlling its supply. Monetary policy regulates both volume and value of currency and credit.
Objective of Monetary Policy
• • • •
To control the supply of money. To control the cost of money and credit. Exchange stability Full employment
Instruments or technique of credit control / monetary policy:1. Bank Rate Bank rate is that rate which is charged by Central bank for issue loan to the member banks. By changing it, central bank can control the credit. → If Central bank increase this bank rate, all commercial banks will increase their interest rate by this loan become costly and flow of fund in the form of credit will decrease. → If central bank wants to expand credit, then Central bank will decrease bank rate, after this commercial bank can get advance and loan at cheap rate and by this way, they also decrease their interest rate. After this flow of cash in the form of loan will increases.
2. Open Market Operation Open market operation is the all action which is done by central bank for purchase and sale of member banks' security in open market. If RBI wants to contract the credit, then RBI will sell the security of member
bank and member bank's flow of cash will stop. If RBI wants to expand credit in recession, then RBI will start to buy the security of member banks and member banks get cash and they can now use it for providing more loans to customers.
3. Cash Reserve Ratio / Statutory minimum reserve:Cash reserve ratio is the minimum percentage of the deposit to be kept as reserve by the banks with central bank. It can be used as the technique of monetary policy. By changing cash reserve ratio, RBI can contract or expand credit in Indian economy. → If RBI wants to contract credit, and then RBI will increase this ratio. After this all banks have to keep more fund as reserve with RBI. So, they will decrease the amount of loan due to decrease the total fund available for enterprises. → If RBI wants to expand credit, then RBI will decrease this ratio, after this all banks have to keep less fund as reserve with RBI. So, they will issue more credit to public. 4. Changes in Marginal Requirement of loan:Marginal requirement is the difference between value of security and actual loan accepted by bank. Suppose a person wants to take loan of Rs. 80 , we has to give security of Rs. 100 then marginal requirement is Rs. 100 - Rs. 80 = Rs. 20 . → If RBI wants to contract the credit , this rate will increase suppose , if RBI fixes it as 40 % , then customer can get loan of Rs. 60 after giving security of Rs. 100 . So , trend of getting loan will decrease .
→ If RBI wants to expand the credit, this rate will decrease suppose, if RBI fixes it as 10% more people will take loan , if they get Rs. 90 in cash after giving security of Rs. 100 . So , by this way RBI controls credit . 5. Moral Persuasion / Inspiration RBI as central bank of country can control credit with moral persuasion. Under this persuasion, RBI can call a meeting of all commercial bank and give advice in discussion that they should not give loan for speculative purposes. 6. Rationing of Credit RBI has right to create ration of credit under monetary policy. It can be done by following way:-
• • •
To fix the amount of loan for a particular bank. To fix Quota for all banks. To fix Quota for different traders.
7. Regulation of consumer credit
→ In case inflation, prices are increased. To control prices central bank contract credit to reduce the total amount of installment for payment.
→ In case of deflation, prices are decreased to control prices central bank expand credit to increase the amount of installment.
The total supply of money in circulation in a given country's economy at a given time. There are several measures for the money supply, such as M1, M2, and M3. The money supply is considered an important instrument for controlling inflation by those economists who say that growth in money supply will only lead to inflation if money demand is stable. In order to control the money supply, regulators have to decide which particular measure of the money supply to target. The broader the targeted measure, the more difficult it will be to control that particular target. However, targeting an unsuitable narrow money supply measure may lead to a situation where the total money supply in the country is not adequately controlled.
Read more: http://www.investorwords.com/3110/money_supply.html#ixzz1JoAfPUz0
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.