The document defines monetary policy as decisions about the money supply and its purchasing power. It aims to achieve full employment and price stability in both developed and developing countries. Monetary policy tools include open market operations, required reserves, and moral persuasion. The targets can be money supply or interest rates. Different schools of thought have debated the relationship between money supply, prices, and output. The State Bank of Pakistan uses both contractionary and expansionary monetary policy by adjusting the policy rate and money supply in response to economic conditions like inflation, growth, and financial stability. It faces challenges in targeting objectives but can improve forecasting, understand transmission mechanisms, and increase transparency.

2. Definition:
“Monetary policy is concerned with deciding how much money
the economy should have or perhaps more correctly deciding
whether to increases or decrease the purchasing power of
money.”
According to Macconal:
“Changing the money supply to assist the economy to
achieve a full employment”

3. Objectives are classified in two aspects
Under developed countries
Developed countries

4.  To achieve full employment
 To have high Efficiency
 To have large scale of resources mobilization
 To increase Exports
 To have high investment
 To provide price and exchange stability
 To have efficient allocation and utilization of resources
 To raise living standards

5.  To have high aggregate demand without
inflation
 Eradicate inflationary and deflationary gap
 High research/ further development
 Providing assistance to other countries
 Gaining monetary control over others

6.  Contractionary / Tight monetary policy
“Tight monetary policy, also called contractionary monetary
policy, tends to curb inflation by contracting/reducing the money
supply”
 Expansionary /Easy monetary policy
“Easy monetary policy, also called expansionary monetary policy,
tends to encourage growth by expanding the money supply

7. Quantitative Tools
Open Market Operations
Bank Rate
Cash Reserve Requirement
Liquidity ratio
Special deposit
Qualitative Tools
Credit rationing
Credit ceiling
Moral persuasion
Direct action
Advertisement

8.  Employment, economic growth, and inflation
can not control directly, it must choose settings,
or targets, for variables that it can control in
order to best achieve its goals.
 In practice, there are two types of targets:
1. Money supply targets.
2. Interest rate targets.

12. Classical Keynesians Monetarists
Demand for money is simply for
spending on forcible transition
Demand for money for three
motives
 Transaction
 Precautionary
 Speculative
Demand for money related to
demand for holding wealth in other
forms. money is direct substitute of
wealth
Full employment Always full employment is not
possible
MS has a direct proportional
relationship with price
Ms has a direct but not proportion
relationship with price
Increase in Ms result in low (i) with
no immediate effect on NI
increase in MS will directly change
in NI and PT, with the V remain
constant
If people do not want to hold
money, they would invest it to earn
interest
people will possibly invest it to earn
interest ,they may also use it
invested to buy equities or physical
assets
Wages (r) upward and downward
flexible
Wages (r)upward flexible and down
ward rigid
AGS is vertical AGS is positive
Laissez fair Government intervention
Saving and income are the function
of interest rate
Saving depend on income and
investment on interest rate
Changes in MS caused by changes
in NI
Changes in MS cause changes in
the money value of NI

13. In 2000-01 With the free fall of the Rupee in mid-September
2000, SBP had to tighten its monetary policy to defend the
exchange rate
In 2001-02 The tight monetary discipline visible in FY01 was
perceptibly eased in FY02.
In2002-03 a substantial increase in the annual external account
surplus and the easier monetary stance of the SBP left the
money market wash with liquidity during FY03
In 2004-05 During FY04 the thrust of monetary management
was towards aligning the market expectations with
monetary policy stance. Initially during FY04 when interest
rates were under downward pressure

14. In 2005-06 April 2005 in response to the headline when
inflation reaching at 11.3%, SBP remains in monetary
tightening phase
In 2006-07During July-April 14, net credit to private
sector grew by Rs266.4 billion (or 12.6 %) against Rs
339.7 billion (or 19.8 %) in the corresponding period of
FY05 Despite liquidity in the system
In 2007-08 SBP will be closely monitoring the economic
developments and outlook for FY07 and will take
appropriate actions as and when required in pursuit of
maintaining the objective of price stability without
prejudice to economic growth.

15. In 2008-09The tight monetary policy was continued by
SBP under the macroeconomic stabilization programme
and discount rate was raised by 200 bps on 13 November
2008 resulting in cumulative increase of 300 bps.
In 2009-10 The overall level of risk and uncertainty in the
economy has increased and the pressure on the fiscal
position, has escalated and growth in the real economy is
limited. Striking a balance between monetary and
financial stability SBP has decided to support the
recovering real economic activity Therefore, effective
25th November, 2009, the SBP policy rate will be lowered
by 50 bps to 12.5 percent

16. SBP has encountered difficulties to targeting the
inflation, economic growth, employment and interest
rate objectives. but still there are certain difficulties
which are a huge hindrance in the way of Economic
Policy. so SBP can control all hurdles with some
suitable policies………..
(a) improve its capacity to forecast liquidity conditions and
actively preempt inflationary pressures
(b) develop a greater understanding of the channels of
transmission of monetary policy
(c) have an increasingly transparent policy framework

17. THANK
YOU….