Monetary Policy

Som N. Sigdel MBA (Saga)

What is Monetary Policy?

Monetary Authoritys policy to manage supply of money to achieve predetermined macroeconomic goals primarily Price Stability Policy affecting quantity of money which determines cost and availability of credit.

Types of Monetary Policy

Expansionary
Contractionary

Goals/Objectives
Theoretically.. Monetary Policy aims to achieve

Higher Economic Growth

Top priority in the economic agenda Level of economic growth determines fulfillment of social and economic need of people Only way to create job and eradicate poverty

Higher Rate of Employment

Congruent with economic growth objective Go Hand-in-Hand High employment is desired: Unemployment leads to lost output Full employment: All resources available in country are mobilized, National Income is maximum

Price Stability
Inflation increases price deflation decreases Inflation: Fixed income group face economic problem. Problem in every sector of economy Deflation: Flexible income earners face problem. May paralyze the economy Remain free from inflation and deflation! Control money supply. Does not mean stable price. Reasonable limit.

Neutrality of Money
Quantity of money increase: Inflation Quantity of money decrease: Deflation Inflation/Deflation: Disequilibrium Control quantity of money: So that no change in
Aggregate production Aggregate buying and selling General price level

Stability
Exchange Rate Financial Market Interest Rate

Instruments of Monetary Policy

Quantitative Instruments Qualitative Instruments

Quantitative Instruments
Bank Rate/ Discount Rate Open Market Operations(OMOs)
Cash reserve Ratio

Qualitative Instruments
Credit Ceiling Change in Margin Lending Directed Credit Control Moral Suasion

Importance in Developing Countries

Development of Financial Institutions

Underdeveloped country: Lack of Financial Institutions People do not use Bank : All income goes to consumption No encouragement in Saving No Saving: No Investment Obstruction in economic growth

Monetization of Rural Sector

Underdeveloped countries: More people live to rural areas Transaction in barter system Monetary policy helps to remove barter system eg: Kale Damai

Development of Organized Money Market

Lack of organized money market: Money market controlled by big and rich money lenders Exploit general class Central Bank: Unorganized money market into organized. Appropriate interest rate.

Increase in Investment
Low income: High MPC, no saving No Saving : No Investment Monetary Policy: Proper environment for saving, Capital formation
Increasing interest rate (encourage saving) Loan at appropriate interest rate (encourage investment)

Appropriate BOP
Export <Import Export raw material, Import finished goods Monetary Policy: Encourages production of export goods providing subsidies

Any Queries?

Thank You