Monitory policy


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Monitory policy

  1. 1. It is a policy of central bank to control the supply of money often targeting rate of interest with the aim of achieving macro economics stability.
  2. 2.  Tool used by the national govt. to influence the economic outcomes  Aims to regulate the volume of the money supply with in economy  Rests as relationship between interest rate and money supply
  3. 3. Price Stability Increase in the Investment Economic Development Full Employment
  4. 4. Reduce Inflation Rate Balance Interest Rates Improvement in standard of living
  5. 5. Price stability contributes to achieving high levels of economic activity and employment by Improving the transparency of the price mechanism Reducing the inflation risk premier in interest rates
  6. 6.  Has a positive impact on economy  Reduces distortions of inflation or deflation
  7. 7. Central bank plays a critical role in every transaction, business and daily activities, whether it is Economic activity or Individual activity (saving schemes or return matters)
  8. 8. Central bank gives money to commercial banks in the time of crises to avoid panic life situations in the markets.  Acts as the Government Bank  Implements Monetary Policy  Acts as a Banker to Commercial Banks
  9. 9. Inflation Targeting Price Level Targeting Monetary Aggregates Fixed Exchange Rates Gold Standard
  10. 10. Price Level Targeting is jus like Inflation Targeting. Price Stability can be achieved with in time
  11. 11. Currency is measured in units of gold bars
  12. 12. Related to the quantity of money supply.
  13. 13. Monetary authority sell and buy as necessary to keep the exchange rate within the band.
  15. 15. 1.Quantitative Instruments 1. Bank Rate Policy (BRP) Rate at which central bank gives loans to commercial banks Central bank charges 10% as bank rate To control inflation central bank increases the rate of interest 2. Open Market Operation Central bank sells or purchases government securities To remove inflation they sell the government securities Commercial banks will purchase these securities to earn interest
  16. 16. Commercial bank has to keep certain proportion of its assets in the form of reserves Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Variation Reserve Ratios (i.e. CRR+SLR) Central bank Increases the reserve requirements
  17. 17. 1. Moral Suasion Moral request by central bank to commercial banks Loans should not be given for unproductive fields Loans should not be given for speculative purposes and hoarding 2. Consumers Credit Regulation Applied during inflation If the central bank wants to control the supply of money central bank issue directions to commercial banks Loans should not be advanced for consumption purposes
  18. 18. Concerned with the policy of central bank against commercial banks Central bank will not advance loan to commercial banks, those whose borrowings are in excess 4.Publicity Central bank keeps an eye over the activities of the commercial banks If the commercial banks are found advancing loans which create inflation The central bank can black list such banks
  19. 19. Organized capital market Bank rate and other interest rates Willingness of banks Availability of large cash reserves
  20. 20. Suggestions The commercial banks should maintain only a minimum cash reserve and depend upon the central bank for obtaining reserve. The central bank requires that the quantity of money should be increased or decreased to influence the price level. The bank rate policy should effective only when the lending rates of commercial bank are affected by changes in bank rate.
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