The Relation between Monetary Policy and Financial Policy∗

Monetary policy, in the form of flexible inflation targeting, has the objective of stabilizing both
inflation around the inflation target and resource utilization around a sustainable level.
Monetary policy refers to central bank activities that are directed toward
influencing the quantity of money and credit in an economy. By
contrast, fiscal policy refers to the government’s decisions about taxation
and spending. Financial policy has the objective of maintaining and promoting financial
stability. Both monetary and fiscal policies are used to regulate economic
activity over time. They can be used to accelerate growth when an economy
starts to slow or to moderate growth and activity when an economy starts to
overheat. In addition, fiscal policy can be used to redistribute income and
wealth. The overarching goal of both monetary and fiscal policy is normally
the creation of an economic environment where growth is stable and positive
and inflation is stable and low.
Fiscal and monetary policies are frequently used together to restore
an economy to full employment output. For example, suppose an
economy is experiencing a severe recession. One possible solution
would be to engage in expansionary fiscal policy to increase
aggregate demand. The central bank can also do its part by engaging
in expansionary monetary policy.
Monetary policy refers to actions that a nation's central bank can take to control the money supply and
pursue macroeconomic goals that promote sustainable economic growth.

In the United States, the Fed is tasked with managing financial liquidity, growth, inflation, and
consumption, among other things. It does this by modifying interest rates, managing federal cash
reserves, establishing foreign exchange rates, and purchasing or selling government bonds.

Fiscal policy is the government’s use of public spending and taxation to influence the economy. In democracies,
these areas are typically the domain of elected representatives and presidents and prime ministers, rather than of
nonelected appointees who guide monetary policy at central banks. Through fiscal policy, a government seeks
to exert influence to prevent its economy from growing too fast, potentially avoiding a spike in inflation, or to
avoid a slowdown that could lead to a job-destroying recession

Objectives of Monetary Policy

The primary objectives of monetary policies are the management of inflation
or unemployment, and maintenance of currency exchange rates.

1. Inflation

Monetary policies can target inflation levels. A low level of inflation is

considered to be healthy for the economy. If inflation is high, a contractionary
policy can address this issue.

2. Unemployment

Monetary policies can influence the level of unemployment in the economy.

For example, an expansionary monetary policy generally decreases
unemployment because the higher money supply stimulates business
activities that lead to the expansion of the job market.

3. Currency exchange rates

Using its fiscal authority, a central bank can regulate the exchange rates
between domestic and foreign currencies. For example, the central bank may
increase the money supply by issuing more currency. In such a case, the
domestic currency becomes cheaper relative to its foreign counterparts.

Financial stability and central Bank

Nepal Rastra Bank (NRB), being the Central Bank of Nepal, has been entrusted with the
responsibility of maintaining financial stability in the country. NRB aims to fulfill its role in
maintaining financial stability through monetary policy, prudential regulation, and supervision of
individual financial institution, oversight of the whole financial system, crisis management and
resolution, among others
As experienced by other countries around the world, Nepalese financial sector is also
experiencing the trend of deregulation, globalisation and financial innovation. The proliferation of
BFIs in terms of products and services as a result of advancement in information,
communication and technology (ICT) has created more competition and challenges in the
stability of the financial system. Furthermore, with the growing integration of Nepal with the
world economy especially in the area of trade and services as well as dependency on foreign
employment, it is increasingly being exposed to the global forces, shocks and vulnerabilities. As
a regulator and supervisors of the financial system, maintaining financial stability has become a
major policy concern for the central banks worldwide and so does for Nepal.

Even in the case of low integration with global financial market, Nepal is exposed to domestic
and external shocks. Volatility in remittance flows, increase in international oil price, high level of
imports relative to exports, pegged exchange rate regime, frequent volatile liquidity, real estate
sluggishness and other supply shocks have impacted the stability of the financial sector.

15. NRB, being the Central bank of Nepal has to play a vital role in achieving the goal of
financial stability in the country. Accordingly, the NRB Act, 2002, which replaced the previous
NRB Act, 1956 explicitly, expressed financial stability as one of its objectives

Mutual Fund In Nepal

Mutual funds are firms that manage pools of other people's money. Individuals buy shares of
mutual funds, and the funds invest the money in certain specified types of assets, for example,
common stocks, tax-exempt bonds, or mortgages. The shares issued to the investors entitle
them to a pro rata portion of the income generated by these assets. Mutual fund holds cash,
near-cash, stocks, bonds, other types of marketable securities, and, in some cases, real assets
(Bodie, Kane & Marcus, 1995). The exact composition of the portfolio depends on the type of
fund and the investment objective of the fund. Priority to invest in mutual fund remains
comparatively less in comparison to other financial assets in Nepal. Furthermore, investors
preferred to invest in shares in comparison to mutual fund schemes even though mutual fund
investment provide benefits such as reservations in public issue, avoidance of dual taxation in
addition to the dividends provided to its investors.

Issue in Nepalese security market

Comparing the number of listed companiesof developed stock markets,
NEPSE has a very few listed companies. So, one ofthe reasons behind a few
listed companies, is the underdeveloped stockmarket and
backward industrialization
 
5. Conclusion
The major conclusion of this study is that stock market development is
unable toshow significant positive impact on the national economy. Nepalese
stockmarket is characterised by small number of listed companies, low
marketcapitalisation ratio, low value traded ratio, low turnover ratio, high
volatility,high concentration, illiquid and risky market. The correlation results
indicatethat there is positive relationship of GDP with stock market.
Regression resultsshow the positive but insignificant relationship of stock
market variables withGDP. The finding based on regression analysis is not
consistent with the findingsof Demurguc-Kunt and Levine (1995), and Levine
and Zervos (1998). Theinconsistent findings may be due to the factor like
small size of market relativeto GDP. The increasing number of listed
companies, market capitalisation ratio,turnover ratio, and value-traded ratio
indicate that the stock market isdeveloping steadily. The results of primary
data analysis indicate that the poorco-ordination among SEBON, NEPSE,
NRB and Insurance Board; insufficientinformation of stock market;
unavailability of CSD service; poor institutionalstrengthening of SEBON and
NEPSE; low instrument diversification; mal-practices on stock transaction;
frequent changes on policies; poor attention ofgovernment for its
development are some of the major problems of Nepalesestock market.
Furthermore, the survey results underscore
There are four options given to the respondents: small capital market, lack of investor's
confidence, lack of co- ordination between monitoring bodies and restriction of foreign
investors.