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Monetary Policy
Monetary policy involves actions by a nation's central bank to control money supply and achieve economic goals such as full employment, price stability, and economic growth. Key types of monetary policies include expansionary, contractionary, countercyclical, rule-based, and discretionary policies, each serving different economic objectives. The tools used in monetary policy include open market operations, bank rates, and cash reserve requirements among quantitative and qualitative methods.
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Monetary Policy
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- 4. Monetary policy refersto the actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth. Definition
- 6. 6 Price Stability Exchange Rate Stability Balanceof Payment Full Employment Economic Growth Neutrality of Money Objectives of Monetary Policy The Following Are The Principal Objectives of Monetary Policy: Equal Income Distribution
- 7. Full Employment • FullEmployment has been ranked among the foremost objectives of monetary policy. • It is an important goal not only because unemployment leads to wastage of potential output, but also because of the loss of social standing and self-respect.
- 8. Price Stability • Oneof the policy objectives of monetary policy is to stabilize the price level. • Both economics and favor this policy because fluctuations in price bring uncertainty and instability to the economy.
- 9. Economic Growth • Oneof the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. • Economic growth is defined as “the process where by the real per capita income of a country increases over a long period of time.”
- 10. Balance of Payment Anotherobjective of monetary policy since the 1950s has been to maintain equilibrium in the balance of payments.
- 11. Exchange Rate Stability •Exchange rate is the price of a home currency expressed in terms of any foreign currency. • If the exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. • The monetary policy aims at maintaining the relative stability in the exchange rate.
- 12. Neutrality of Money •Economist such as Wicksted, Robertson has always considered money as a passive factor. • According to them, money should play only a role of medium of exchange and not more than that. • Therefore, the monetary policy should regulate the supply of money.
- 13. Equal Income Distribution Manyeconomists used to justify the role of the fiscal policy is maintaining economic equality. However in recent years economists have given the opinion that the monetary policy can help and play a supplementary role in attaining an economic equality.
- 15. Types of MonetaryPolicy? Monetary policy design changes as per the goals set for the monetary policy and theemerging economic scenario. 1. Expansionary Monetary Policy 2. Contractionary Monetary Policy 3. Countercyclical Monetary Policy 4. Rule Based Monetary Policy 5. Discretionary Monetary Policy 15
- 16. Expansionary Monetary Policy Manyeconomists used to justify the role of the fiscal policy is maintaining economic equality. However in recent years economists have given the opinion that the monetary policy can help and play a supplementary role in attaining an economic equality.
- 17. Contractionary Monetary Policy •Contractionary or tight monetary policy aims at preventing inflation by contracting the money supply. • Contraction in money supply is achieved by increasing the policy rates, increasing the reserve requirements and purchasing the government securities from the market.
- 18. Countercyclical Monetary Policy Countercyclicalpolicy aims at moderating the cyclical fluctuations in the economy and stabilizing the economy around its trend path by following countercyclical measures.
- 19. Rule Based MonetaryPolicy • Under rule-based policy money supply and related variables are controlled by predetermined rules, norms and standards. • The central bank authorities cannot use their discretion to change the values of these variables.
- 20. Discretionary Monetary Policy DiscretionaryMonetary Policy allows the central bank greater autonomy in the conduct of monetary policy. Under such a policy rather than getting constrained by the pre-set rule, the central banks, after assessing the emerging economic scenario and using its own judgment, can change the values of money supply and the related variables.
- 22. TOOLS OF MONETRYPOLICY 22 • O p e n M a r k e t O p e r a t i o n s • B a n k R a t e • C a s h R e s e r ve R e q u i r e m e n t • L i q u i d i t y R a t i o • S p e c i a l D e p o s i t Quantitative Tools • C r e d i t R a t i o n i n g • C r e d i t C e i l i n g • M o r a l P e r s u a s i o n • D i r e c t Ac t i o n • Ad v e r t i s e m e n t Qualitative Tools
- 24. • Control Inflationor Deflation • Availability of the Supply of money and Credit • Integrated Interest Rate Structure • Effective Central Banking • Long-Term Loans for Industrial Development • Creation of Financial Institutions SIGNIFICANCE OF MONETARY POLICY 24
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Editor's Notes
- #4 Monetary policy refers to the actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth
- #16 1 aims at encouraging spending on goods and services by expanding the supply of credit and money by lowering the policy rates (bank rate or repo rate), lowering the reserve requirements and purchasing the government securities from the market. 2 aims at preventing inflation by contracting the money supply. 3 aims at moderating the cyclical fluctuations in the economy and stabilizing the economy around its trend path by following countercyclical measures. 4 Under rule based policy money supply and related variables are controlled by predetermined rules, norms and standards. 5 Discretionary Monetary Policy allows the central bank greater autonomy in the conduct of monetary policy.