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 ofmonetary 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 widenrange 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 MonetaryPolicy…… 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. 8
Tools of Monetary Policy…. There are four basic tools or instruments ofmonetary policy which can be used to achieveeconomic & price stability by influencing aggregatedemand 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 policymeasures are adopted as a part of anexpansionary monetary policy to curerecession & to establish theequilibrium of national income atfull 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 measuresgenerally adopted as tight monetarypolicy 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 VIEWEXPANSIONARY MONETARY POLICY TIGHT MONETARY POLICYProblems : Recession & Unemployment Problem : InflationMeasures : Measures : 1. Central bank buys securities through 1. Central bank sells securities through open market operation open market operation 2. It reduces CRR 2. It raises CRR & SLR bank rate 3. It lowers bank rate 3. It raises maximum margin against holding of stocks of goods Money supply increase Money supply decrease Interest rate falls Interest rate decrease Investment increase Investment expenditure declines Aggregate demand increase Aggregate demand declines Aggregate output increase 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 CountriesIn 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.