Download monetary policy - GCG-42

MEANING OF MONETARY POLICY
Introduction- Monetary policy is concerned with the
changes in the supply of money and credit. It refers to
the policy measures undertaken by the government or
the central bank to influence the availability, cost and
use of money and credit with the help of monetary
techniques to achieve specific objectives. It aims to
influence two major variables:
1. Money or Credit Supply
2. The rate of interest.
DEFINITIONS
 “the management of the expansion and contraction of
the volume of money in circulation for the explicit
purpose of attaining a specific objectives such as full
employment,” by R.P. Kent
 According to Shapiro,
“ Monetary Policy is the exercise of the central bank’s
control over the money supply as an instrument for
achieving the objectives of economic policy.”
OBJECTIVES
Various objectives or goals of monetary policy are:
 Neutrality of money
 Exchange stability
 Price stability
 Full Employment
 Economic growth
INSTRUMENTS OF MONETARY
POLICY
The monetary authority can influence the level of
aggregate demand for the purpose of achieving
specific economic objectives through three prime
levers:
1. Supply of Money
2. Cost of Money
3. Availability of Credit
The instruments of monetary policy are the devices
through which supply and cost of money and
availability of credit can be affected in Qualitative or
Quantitative terms.
QUANTITATIVE AND QUALITATIVE
INSTRUMENTS







Bank rate
Open Market Operations
Variations in Reserve Requirements
Ceiling on Advances
Advances Directives
Moral suasion
Consumer Credit Regulations
These instruments influence upon supply, cost and
availability of money which ultimately shape the pattern of
variations in the level of aggregate demand and the
general level of economic activity.
ROLE OF MONETARY POLICY IN
DEVELOPING COUNTRIES
Developing versus Developed EconomiesThe monetary policy in a developing economy will
have to be quite different from that of a developed
economy mainly due to different economic conditions
and requirements of the two types of economies.
A developed economy may adopt full employment or
price stability or exchange stability as a goal of the
monetary policy. But in developing economy economic
growth is the primary and basic necessity. Thus, in a
developing economy the monetary policy should aim
at promoting economic growth.
ROLE OF MONETARY POLICY IN
DEVELOPING COUNTRIES….contd.






Monetary Policy can serve the following
developmental requirements of developing
economies:
Developmental Role
Creation and Expansion of financial Institutions
Effective Central Banking
Integration of Organised and Unorganized Money
Market
Developing Banking Habits
Monetisation of Economy
ROLE OF MONETARY POLICY IN
DEVELOPING COUNTRIES….contd.
 Integrated Interest Rate Structure
 Debt Management
 Maintaining Equilibrium in Balance of Payments
 Controlling Inflationary Pressures
 Long Term Loans for Industrial Development
 Reforming Rural Credit System
LIMITATIONS AND PROBLEMS OF
MONETARY POLICY
LIMITATIONSMonetary policy has been defined as a policy of the
central bank to control the money supply for achieving
the objectives of general economic policy. This implies
that the problem of monetary policy is the
determination of the optimal quantity of money, or in
dynamic conditions, the optimal rate of growth of the
money stock. But in actual practice, it is difficult not
only to define but also to determine the optimal
money stock.
LIMITATIONS AND PROBLEMS OF
MONETARY POLICY……..contd.
So in real world monetary policy faces a number of
problems which reduces its scope and effectiveness, which
are Conflicting Goals
 Lags in Monetary Policy:
1. Recognition Time Lag
2. Action Time Lag
3. Inside Time Lag
4. Outside Time Lag
 Changes in Velocity of Money:
Velocity of money can vary in number of ways----Development of NBFIs
LIMITATIONS AND PROBLEMS OF
MONETARY POLICY……..contd.
Portfolio Adjustment of Commercial Banks
Intensive Use of Available Money Supply
 Target Problem
 Indicator Problem
EFFECTIVENESS OF MONETARY
POLICY IN BOOM AND INFLATION
In Boom:
The basic problem during boom time is one of an
overly expansion of aggregate demand. An antiinflationary policy stressed upon reduced money
supply and increased interest rate structure. A
combination of tight money and credit measures may
keep the system in equilibrium at full employment
without inflation.
We can follow the following measures to control the
supply of money:
1. Changes in the velocity of money
EFFECTIVENESS OF MONETARY POLICY
IN BOOM AND INFLATION…….contd.
2. Commercial bank portfolio adjustment
3. Growth of NBFIs
4. Evolution of methods of more effective use of
available funds
5. Risk destabilisation
6. Debt management operations
7. Discriminatory Effect
8. Uncertainty concerning appropriate monetary policy.
THE END