This document provides background information on monetary policy. It defines monetary policy as how central banks manage money supply to promote economic goals. It discusses how central banks execute monetary policy independently of governments through tools like interest rates and reserve requirements. The objectives of monetary policy are maintaining price stability and economic growth. The document also outlines the process of monetary policy decision making in Bangladesh, which involves setting targets and using tools like open market operations and bank rates.

1. Background of the Study
Monetary policy is the term used by economists to describe ways of managing the
supply of money in an economy. It is the process by which the monetary authority of
a country controls the supply of money often targeting a rate of interest for the
purpose of promoting economic growth and stability.
Monetary policy rests on the relationship between the rates of interest in an
economy, that is, the price at which money can be borrowed, and the total supply of
money
Within almost all modern nations, special institutions (such as the Federal Reserve
System in the United States, the Bank of England, the European Central Bank, the
People’s Bank of China, and the Bank of Japan) exist which have the task of
executing the monetary policy and often independently of the executive. In general,
these institutions are called central banks and often have other responsibilities such
as supervising the smooth operation of the financial system.
With the creation of the Bank of England in 1694, which acquired the responsibility to
print notes and back them with gold, the idea of monetary policy as independent of
executive action began to be established. The goal of monetary policy was to
maintain the value of the coinage, print notes which would trade at par to specie, and
prevent coins from leaving circulation. The establishment of central banks by
industrializing nations was associated then with the desire to maintain the nation’s
peg to the gold standard, and to trade in a narrow band with other gold-backed
currencies. (www.bangladesh-bank.org)
Objectives of the study
The important objectives of the study include:
i)To give a theoretical overview of monetary policy in general.
ii)To know about Monetary Policy of Bangladesh.
iii)To explore the monetary policy tools those are used in Bangladesh.
iv)To investigate the challenges that create varies to the path of implementation of
monetary policy in Bangladesh.

2. Methodology of the Study
This study has been prepared on the basis of experience gathered from theoretical
knowledge. Only secondary data have been collected to prepare this study. I have
presented my experience and findings by using different figures and tables in the
various part of this study.
The data are collected from the given sources.
Prospectus of Bangladesh Bank
Website of Bangladesh Bank
Book, magazine etc.
For preparing this study, I have collected the information from various website.
Limitations of this Study
I have faced some problems while conducting the study some of which are as
follows:
1) Relevant information was not as available as required.
2) Limited analytical tools have been used due to practical experience and time
constraint.
3) Due to lack of practical experience, some errors might be occurred during the
study. Therefore maximum efforts have given to avoid mistake.
A Theoretical Picture Of Monetary Policy
Definition of Monetary Policy
Monetary policy is the term used by economists to describe ways of managing the
supply of money in an economy.
The actions of a central bank, currency board or other regulatory committee that
determine the size and rate of growth of the money supply, which in turn affects
interest rates. Monetary policy is maintained through actions such as increasing the
interest rate, or changing the amount of money banks need to keep in the vault. (By
Geoffrey St. Marie,2011)
Monetary policy includes all monetary decisions and measures irrespective of
whether their aims are monetary and non-monetary, all non-monetary decision and
measures that aim it affecting the monetary system.( Paul Einzig, 2008)
Monetary policy employing the central bank’s control of supply of money as an
instrument for achieving the objectives of general economic policy. (Harry G.
Johnson,2008)

3. Significance of Monetary Policy
The Monetary Policy has a great significance on economy. Some of there are as
follows. (www.bangladesh-bank.org)
i)To control supply of money
ii) To Setup rate of interest.
iii) To promote economic growth & stability.
iv) To stabilize price & low unemployment.
v) To control inflation & deflation.
Tools of Monetary Policy Generally Used
Monetary policy tools are as follows
a) Monetary base
Monetary policy can be implemented by changing the size of the monetary base.
Central banks use open market operations to change the monetary base. The central
bank buys or sells reserve assets (usually financial instruments such as bonds) in
exchange for money on deposit at the central bank. Those deposits are convertible to
currency.
b) Reserve requirements
The monetary authority exerts regulatory control over banks. Monetary policy can be
implemented by changing the proportion of total assets that banks must hold in
reserve with the central bank. Banks only maintain a small portion of their assets as
cash available for immediate withdrawal; the rest is invested in illiquid assets like
mortgages and loans. By changing the proportion of total assets to be held as liquid
cash, the Federal Reserve changes the availability of loan able funds. This acts as a
change in the money supply
c) Discount window lending
Discount window lending is where the commercial banks, and other depository
institutions, are able to borrow reserves from the Central Bank at a discount rate.
This rate is usually set below short term market rates (T-bills).It is of note that the
Discount Window is the only instrument which the Central Banks do not have total
control over.
d) Interest rates
The contraction of the monetary supply can be achieved indirectly by increasing the
nominal interest rates. Monetary authorities in different nations have differing levels

4. of control of economy-wide interest rates. . By raising the interest rate under its
control, a monetary authority can contract the money supply, because higher interest
rates encourage savings and discourage borrowing. Both of these effects reduce the
size of the money supply.
e) Currency board
A currency board is a monetary arrangement that pegs the monetary base of one
country to another, the anchor nation. As such, it essentially operates as a hard fixed
exchange rate, whereby local currency in circulation is backed by foreign currency
from the anchor nation at a fixed rate. Thus, to grow the local monetary base an
equivalent amount of foreign currency must be held in reserves with the currency
board. This limits the possibility for the local monetary authority to inflate or pursue
other objectives.
f) Unconventional monetary policy at the zero bound
Other forms of monetary policy, particularly used when interest rates are at or near
0% and there are concerns about deflation or deflation is occurring, are referred to as
unconventional monetary policy. These include credit easing, quantitative easing,
and signaling. (Monetary Policy”. Federal Reserve Board. January 3, 2006.)
Bodies of Monetary Policy
With the recommendation of World Bank/IMF, government in 2003 provided the
degree of autonomy to the bank to carry out its responsibilities without undue
interference of the government and a new body, called co-ordination Council.
This council consists of the following governing body
Minister of Finance
Minister of Commerce
Governor of BB
Secretary of Finance Division
Secretary of Internal Resource Division
Member Planning Commission
Source: General Banking by L.R. Chowdhury
This council headed by Minister of Finance with Minister of commerce, Governor of
Bangladesh Bank, Security of Finance divisions, Secretary of internal resource
division, Member of Planning commission as the members has been set up to

5. oversee the Bangladesh Bank’s Monetary Policies. (General Banking by L.R.
Chowdhury)
Monetary Policy Decision- Making Process
The MPC sets monetary policy that is consistent with domestic economic conditions
to ensure price stability and sustainable economic growth. In addition, the MPC plays
an important role in determining guidelines for exchange rate policy that is consistent
with the monetary policy stance. Approximately every six weeks ( 8 times a year), the
MPC needs to assess the economic and financial condition as well as the risk factors
that may affect future inflation and economic growth in its consideration of monetary
policy direction. In each meeting the MPC secretariat presents the latest economic
data on financial market conditions, fiscal position, international financial
environment, and production, as well as other factors that may affect the price level,
including world commodity prices and US interest rates. The plausible trends of these
variables are widely discussed and subsequently incorporated into the inflation and
GDP forecasts.
The Bangladesh Bank undertakes open market operations to ensure that the policy
rate is held- as close as possible- to the level determined by the MPC. Each quarter,
the Bangladesh Bank publishes a quarterly inflationary report to present the latest
economic and inflation forecasts to the MPC in a clear and forward looking manner,
as well as communicates to the general public views of the MPC to in reaching their
various policy decisions. (Bangladesh Economic Review 1999, Ministry of Finance,
Government of Bangladesh.)
Monetary Policy: Bangladesh Experience
Background of monetary policy in Bangladesh
The policy adopted by the central bank for control of the supply of money as an
instrument for achieving the objectives of general economic policy. As stated in the
Bangladesh Bank order 1972, the principal objectives of the countries monetary
policy are to regulate currency and reserves. To manage the monetary and credit
system; to preserve the par value of domestic currency ; to promote and maintain a
high level of production, employment and real income ; and to foster growth and
development of the country’s productive resources in the best national interest.
Although the long term focus of monetary policy in Bangladesh is on growth with

6. stability, the short term objectives are determined after a careful and realistic
appraisal of the current economic situation of the country.
With the shift of the policy stance of the government in various phases, necessary
adjustments were made in the country’s monetary policy in the first year after
liberation, the primary target of monetary policy was to regulate not the quantity of
money, but the direction of the flow of money and in support of the government
financial programmed. In 1975, Bangladeh entered in to a standby-arrangement with
IMF and the country’s monetary policy got a changed shape, which fixed an explicit
target to save limit of monetary expansion on annual basis, with this change,
Bangladesh Bank started setting short-term objectives of monetary policy in close
collaboration of the government and tried to achieve the target by using the direct
instrument of control. The principal target of monetary control was broad money (M2)
i.e. , the sum of the currency in circulation and the total deposits of money in banks.
The targeted growth of M2 depended on a realistic forecast of the growth rate of real
GDP, an acceptable rate of inflation and an attainable level of international reserve.
Bangladesh Bank took majors to monitor credit and monetary expansion keeping in
view the price situation and international reserve position. Efforts were made to
achieve the targeted growth of domestic credit and thereby, the money supply,
through imposing ceiling on credit to the government, public and private sector. The
major policy instrument available to Bangladesh Bank and provide liberal refinance
facility at confessional rate for priority lending. According to the national economic
policy, the Banks were to provide the desired volume of credit t and administered and
low rate of interest. In that situation, Bangladesh Bank practically did not have any
effective instrument for making adjustment in the growth of money supply or for
transmitting market signals into changes in money supply. The monetary policy
therefore, could not function in true sense as a result the banking system could not
play its role as an effective financial intermediary. (Central Banking in the New
Millenium.” Ahluwalia,)
Strategy of Monetary Policy in Bangladesh
The MPS (Monetary Policy Statement) starts with expression of the monetary policy
frameworks in terms of the goals, instruments, and the channels of transmission.
Maintaining price stability while supporting the highest sustainable output growth is

7. the stated objective of monetary policies pursued by the Bangladesh Bank.
(http://www.scribd.com )
Frameworks of Bangladesh’s Monetary Policy
The framework of monetary policy in Bangladesh set out below
a) The Policy Target
In this backdrop it is necessary that the monetary policy framework (in terms of the
goals, the instruments, and the analytic channels of transmission) be articulated for
greater clarity and transparency benefiting both the policy makers as well as the
stakeholders. A policy system, where the goals are transparent and their
achievement verifiable, directly adds to the credibility of the central bank, a major
objective of this document is to define such a framework. Most industrial economy
monetary policy is run with the task of keeping watch on both the output gap (i.e., the
deviation of actual output from its long-run equilibrium level) and the inflation gap,
which is similarly defined. In contrast, however, the challenge in the developing world
is how to augment the capacity output through both productivity growths as well as
via the installation of additional capacity.
Faster growth in most developing contexts is necessary to reduce (and eventually
eliminate) common poverty. Hence the appropriate monetary policy strategy in the
Bangladesh context would be to achieve the goal of price stability with the highest
sustainable output growth. Any monetary stimulus to promote growth must keep in
perspective the broader goal of macroeconomic stability, which is a prerequisite for
future growth. Price stability would also include the stability of the currency regime.
While fiscal policy too is relevant in addressing these goals and thus there is a need
for policy coordination, monetary policy must play its due role. While leading central
banks in the industrial world have increasingly adopted the unitary goal of fighting
inflation, interestingly directive by enumerating-
i)The promotion of price stability.
ii) Ensuring full employment.
iii) Supporting global economic and financial stability (so long as the latter maybe
targeted without prejudicing the first two goals) as the chief monetary policy goals.
In broad terms therefore the latter view is consistent with the BB vision as
enunciated above, although anchored along different perspectives.
b) Inflation Target

8. It is the general wisdom that monetary policy tools are of immediate influence in
controlling inflation. However contemporary evidence amply illustrates that monetary
policy cannot deal well with the inflationary impact of external shocks such as the
recent international price of oil and related energy products. Many central banks as a
consequence focus on the core inflation, which is typically constructed by subtracting
the most volatile components (e.g., food and energy prices, indirect taxes etc) from
the consumer price index (CPI). The Bank of Canada argues
that it is the core concept that better predicts the underlying price stability in the
economy. Hence as a policy goal, core inflation may be a more credible target than
CPI inflation. While there is no standard measure of core inflation in the Bangladesh
context at this time, the construction methodology is made complex by two facts. First
is that food items constitute nearly 60 percent of the CPI index, and while the
appropriate commodity group weights may require a re-think, to ignore food entirely
in defining the core inflation may render the construction a bit like throwing the baby
away with the bath water. Secondly, in the Bangladesh context, the volatility of the
international energy prices appear not to filter down to the CPI since the relevant
domestic prices are subsidized by the state. Periodic adjustments in administered
energy prices have always lagged the world market changes in both the time line as
well as in magnitude often most dramatically. While it may be useful to focus on the
non-food component of the index (which occupies only 41.6 percent of the full CPI) in
order to gauge at the build-up of underlying inflationary forces in the economy, it
would be unwise to treat this alone as a valid measure of core inflation.
c) Growth target
GDP growth projections of the Medium Term Macroeconomic Framework (MTMF) in
the government’s National Strategy for Accelerated Poverty Reduction (NSAPR),
modified appropriately in the light of unfolding actual developments, are used as
output growth targets for the purpose of monetary policies.
(National Policy Forum Dhaka: 20-22 August, 2009 Organized by: Centre for Policy
Dialogue, Prothom Alo, The Daily Star,)
Instruments of Monetary Policy in Bangladesh
In 1989, the government adopted a comprehensive Financial Sector Reform
Programmed (FSRP), following which the country’s monetary policy assumed a new
orientation towards promotion of market economy in a competitive environment.

9. Bangladesh Bank started moving away from direct quantitative monetary control to
indirect methods of
Monetary management since the beginning of 1990. Although, the fixation of target
continued to remain as the central piece of exercise, the way to achieve it had been
changed. Credit ceilings on individual banks and direct controls of interest rates were
withdrawn. At present, the money supply is regulated through indirect manipulation of
reserve money instead of credit ceiling. Major instruments of monetary control
available with Bangladesh Bank are the bank rate, open market operations,
rediscount policy, and statutory reserve requirement.
The methods of credit Control
The methods of credit control can be classified as follows
Quantitative Methods
i)Bank rate policy
ii)Open market policy
iii)Variation of reserve ratio
Qualitative Methods
i) Rationing of credit
ii) Direct action
iii)Regulation of consumers’ credit
iv)Moral persuasion
v)Publicity
The methods of credit control are described below
Quantitative Methods
The methods by which Central Bank controls the total amount of credit in the
economy are termed as quantitative methods of credit control.
a) Bank rate policy
The rate which central bank lends money to the commercial banks and discounts bill
of exchange is called bank rate. If central bank increases the bank rate then the
commercial banks will increase their marker of interest rates. As a result the
borrowers borrow less form commercial banks and amount of credit reduces in the
economy. In an opposite
way amount of credit will be increased in the country.
Effects

10. Effects on price level: If bank rate increases, cost of credit will increase and the
businessmen will reduce their borrowing s form commercial banks. This will reduce
production and increase unemployment in the economy. As a result, income and
price level will go down and depression in business and trade will be the outcome. If
there is a decrease in the bank rate the opposite e results of above will be
experienced in the economy.
Effects on foreign trades: An increase in bank rate wills increases other interest
rates in the country. So, investment will be profitable. It will ensure the insertion of
foreign capital into the economy and leakage of domestic capital will be stopped.
Moreover,
increased bank rate will decrease the piece level because amount of credit will be
reduced into country. This decreased price level will again encourage expert and
discourage import, which will make balance of payment favorable. Opposite effects of
above will be experienced if the central bank decreases the bank rate in the
economy.
Limitations of Bank rate policy
i) Bank rate policy would not be effective if there lacks strong linkage between bank
rate and market/ interest rate especially for a developing country like Bangladesh.
ii) If commercial banks have excessive money; then bank rate may not be effective
because they will lend in lower interest rates though bank rate increases.
iii) Bank may successes during the time of prosperity. Because businessmen become
highly ambitious of their profits in this situation and will borrow money though the
interest rate increases.
iv) Reduction in bank rate may not be successful to increase the amount of credit
during the time of depression. So, bank rate policy has several limitations in its
operation. After that it is the best weapon of central bank to control the
amount of credit in the economy.
b) Open market policy
The method by which the central bank controls the amount of credit by selling and
buying government credit instrument is termed as open market operation. When the
central bank intends to contract credit, it sales the credit instruments in the market.
These instruments are purchased by commercial banks and people also buy them
issuing cheque to the commercial banks. Thus money goes to the central bank and

11. amount of money for credit creation reduces which in turn contracts the amount of
credit in the economy.
Limitations of open market policy
i) Selling- it reduces amount of cash of commercial banks .but if commercial banks
take loan form central bank it would not be effective to reduce credit.
ii) Buying- it increases the amount of cash in commercial banks. But it may not be
able to expand credit if commercial banks repay loan to the central bank with this
increased cash.
iii) Depreciation- During depreciation credit expansion through purchasing credit
instruments is not possible. Because in this period businessmen will not want
tomorrow from commercial bank.
c)Variation of reserve ratio
Each commercial bank has to keep legally a certain portion of its total deposits as
reserve with central bank. This is called reserve ratio. If central bank increases this
reserve ratio, excess reserve in commercial banks will reduce and
thus credit creation will be contracted in the economy. In an opposite way central
bank can increase the amount of credit by decreasing the reserve ratio.
Limitations
i) Increase in reserve ration can be effective for that commercial bank having small
amount of cash. Because bank having large volume of cash will have sufficient
excess reserve to create credit though reserve ration increases. In this case it will not
be effective.
ii) Decrease in reserve ration may not be effective to expand credit during depression
businessmen are discouraged to borrow in this situation.
iii) Non-scheduled commercial banks are out of this control.
Qualitative Methods
The methods used to control credit in special sectors for special purposes are called
qualitativeselective methods of credit control. These methods do not deal with the
amount of credit rather change the flow or direction of credit used in different sectors
of economy.
a)Rationing of credit
Rationing of credit means fixing the amount of credit among different sectors of the
economy. By this method central bank can decrease the amount of credit in one

12. sector and can increase it in other sector. For example, if central bank thinks that
there is excessive investment in garments industry and jute industry suffers form
required investment, then it can order the commercial banks not to disburse credit
beyond required amount in garments industry and divert the excess amount to jute
industry.
Limitations
i)Borrowers may use the credit money in other purposes.
ii) It is difficult for central bank to supervise whether the credit money is being used
purposively or not.
iii) Sometimes commercial banks think this type of work as an unwanted intervention
by central bank.
b)Direct action
If it is proved by central bank that credit creation policy of any commercial bank is not
transparent then central bank can take punitive measures against that bank and thus
affects its credit creation. These punitive measures may be of not rediscounting bills
of exchange, discounting bills of exchange at a rate higher than the prevailing rare,
etc. As a result, the commercial bank will compelled to follow sound central bank
policy.
c)Regulation of consumers’ credit
It is a method to control credit in consumable goods, which are purchased in
installment basis. If central bank circulates to increase the amount of down payment
or reduce the number of installment then consumer’ credit will be contracted in the
economy. In an opposite way consumers’ credit can be increased. It was followed in
USA during Korean War.
d)Moral persuasion
To make the banking system sound and efficient, central bank sometimes requests
the commercial banks to increase or decrease credit. As a guardian’s request,
commercial banks follow it and thus amount of credit is controlled in the economy.
e)Publicity
Sometimes central bank applies publicity as a weapon of credit control. Central bank
publishes weekly, fortnightly or monthly bulletins and annual reports where balance
sheets and other business and economic condition of different commercial banks are
presented well. As a result the commercial banks become more careful in the line of

13. their credit creation. Thus central bank applies various types of measures to control
credit in the economy. But central bank should apply different types of method
simultaneously rather to use single method to make credit control effective. (
Bangladesh Bank Working Paper Series: WP 0708, 2007)
Challenges, Recommendation &Conclusion
Key Challenge for Monetary Policy of Bangladesh
The challenges of monetary policy in Bangladesh are as follows
1. There Exist a Non-Monetized Sector
In Bangladesh there is a existence of non monetized economy in large extent people
areas where many of the transaction are of the barter type and not monetary type
.similarly ,due to non monetized sector the progress of commercial banks is not up to
mark ,this creates a major bottleneck in the implementation of the monetary policy in
Bangladesh.
2. Excess Non Banking Financial Institutions (NBFI)
As the economy launch itself into a orbit of economic growth and development,the
financial sector comes up with great speed as a result many non banking financial
institutions (NBFI) come up ,these NBFIs also provide create in the economy
,however the NBFIs is do not come under the purview of a monetary policy and thus
nullify the effect of a monetary policy.
3. Existence of Unorganized Financial Markets
The financial markets help in implementing the monetary policy ,in many developing
countries the financial markets especially the money markets are of an unorganized
nature and in backward conditions ,in many places people like money lenders
,traders ,and business actively take part in money lending ,but unfortunately they
don’t not under the purview of a monetary policy and creates hurdle in the success of
a monetary policy
4. Higher Liquidity Hinders Monetary Policy
In rapidly growing economy the deposit base of money commercial bank is
expanded, this creates excess liquidity in the system .under this circumstance even if
the monetary policy increase the CRR or SLR, it does not deter commercial banks
from credit creation ,so the existence of excess liquidity due to high deposit base is a
hindrance in the way of successful monetary policy.
5. Money Not Appearing In an Economy

14. Large percentage of money never comes in the mainstream economy, rich people,
traders ,business and other people prefer to spend rather than to deposit money in
the bank ,this shadow money is used for buying precious metals like gold silver
,ornaments ,and land and in speculation ,this type of lavish spending give rise to
inflation trend in mainstream economy and the monetary policy fails to control it.
6. Time Lag Affects Success of Monetary Policy
The success of the monetary policy depends on timely implementation of it ,however
,in many cases unnecessary delay is found in implementation of the monetary policy
,or many times timely directives are not issued by the central bank , then the impact
of the monetary policy is wiped out.
7. Monetary and Fiscal Policy Lacks Coordination
In order to attain a maximum of the above objectives ,it is unnecessary that both the
fiscal and monetary policies should go hand ,as both these policies are prepared and
implementation by two different authorities ,there is a possibility of non coordination
between these two policies ,this can harm the interest of the overall economic policy.
Recommendation
i) In Bangladesh, capital markets should be expanded and organized enough to
succeed the monetary policy.
ii) The credit control mechanisms like open market operation, bank rate, etc. should
be effective.
iii) A narrow bill market should make the discount rate effective.
iv) Banking habits are also underdeveloped which hampers the effectiveness of
monetary policy seriously. So banking habits should be developed.
v) Steps should be taken to abolish the existence of liquidity trap.
vi) To run the monetary policy smoothly and effectively, it is essential to pay sufficient
attentions to increase the GDP.
Conclusion
In view of formulating credible monetary policy to attain the achievement of economic
objective, the difficult part for the central banks is to distinguish, within ongoing
inflation evolutions, between short term volatility and the underlying pressure of
inflation,. While it has now become standard practice for most central banks around
the world to monitor core inflation, no progress has so far been made in the
Bangladesh context. The paper takes a pioneering look in measuring core inflation in

15. Bangladesh focusing on the popular exclusion and trimmed mean approaches. The
performance criteria adopted in this analysis so that the measure of core inflation
developed in the paper has strong money-induce characteristics and therefore, can
credibly be used as a short or medium term guide of monetary policy in Bangladesh.
Bibliography
Books & Journals
1. Bangladesh Bank, Monetary Policy Statement, January, 2007 to 2008
2. Akram, Tanweer; “Bangladesh’s Privatisation Policy”, Journal of Emerging Markets,
Volume 4, No. 2, Centre for Global Education, New York, USA, 1999.
3. Annual Report of Bangladesh Bank on Monetary Policy 2009 to 2011
4. General Banking by L.R. Chowdhury.
Websites:
1. http//www.bangladesh-bank.org
2. http//www.mtb.com.bd
3. http://ec.europa.eu/economy_finance/publications
4. www.cpd.org.bd
5. http//www.google.com
6. http//www.wikipedia.com
7. http://www.imf.org
Objectives of Monetary policy in Bangladesh:
As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's
monetary policy are
1. To regulate currency and reserves;
2. To manage the monetary and credit system;
3. To preserve the par value of domestic currency;
4. To promote and maintain a high level of production, employment and real income; a
5. To foster growth and development of the country's productive resources in the best
national interest.
Although the long term focus of monetary policy in Bangladesh is on growth with stability,
the short-term objectives are determined after a careful and realistic appraisal of the current
economic situation of the country.

16. Monetary Policy the policy adopted by the central bank for control of the supply of money as
aninstrument for achieving the objectives ofgeneral economic policy. Asstated in the Bangladesh Bank
Order 1972, the principal objectives of the country'smonetary policy are to regulate currency
and reserves; to manage the monetary andcredit system; to preserve the par value of domestic
currency; to promote andmaintain a high level of production, employment and realincome; and to
foster growth and development of the country's productive resources in the best
nationalinterest.Bangladesh useminimum reserve system for issuing note in the country. Under thissystem, the
central bank has tokeepaminimum reserve ofgold against the issue ofnotes. The bank can also issue
notes up to any extent necessary; no minimum limitof noteis fixed.
Monetary Policy the policy adopted by the centralbank for control of the supply of moneyasan
instrumentforachieving theobjectivesofgeneraleconomicpolicy. Asstated in the Bangladesh Bank Order 1972,
the principal objectives of the country'smonetary policy are to regulate currency and reserves;
to manage the monetary andc re dit syste m; to pre se rve the pa r va lue of dome stic
c urre nc y; to promote a ndmaintain a high level of production, employment and real

17. income; and to foster growth and development of the country's productive resources in the best
nationalinterest.Bangladeshuseminimum reservesystemforissuingnotein thecountry.Underthissystem,thecentralbank
hastokeepaminimum reserveofgoldagainsttheissue ofnotes. The bank can also issue notes up to any extent
necessary; no minimum limitof noteisfixed.
These coins are currently circulating in Bangladesh as money.
The monetary system of Bangladesh is decimal based, with the primary unit
of Bangladeshi money being called the Taka. The names and relative values of the coins
depictedaboveare,fromlefttoright:■
One Poisha -
1/100ofaTaka■
Five Poisha -
5/100ofaTaka■
TenPoisha-
10/100ofaTaka■
Twenty-FivePoisha-
25/100ofaTaka■
ifty Poisha -
50/100ofaTaka■
One Taka-
100/100,1fullTaka■
Five Taka-
500/100,5fullTaka
**Please note that this listing only includes the coins in circulation. There will be paper money
circulating as well.
The Broad Discussion of Monetary Policy Objective
►Price stability
Inflation distorts economic calculations and expectations while deflation
createsdepressionintheeconomy.Thuspricestabilityshouldbethemainaimofmonetary policy. Price stability
promotesbusinessconfidence,makeseconomiccalculation possible,controlsbusinesscycleandintroduces
certaintyineconomiclife.Be that as it ma, it must be admitted that price stability does not
be necessarilymean absolute constancy of price level. A very slow rising price level
(or mildinflation)mayhaveallthevirtuesofastablepricelevel,whichcancontributemoredirectlytoeconomicgrowth.
► Exchange Stability
Maintenance of stable exchange rates is an essential condition for the creation of international
confidence and promotion of smooth international trade on the largestscale possible. A restrictive
monetarypolicytrendstoreduce acountry’sbalance of paymentdefectinthefollowingways:● It te nds to
re duce de mandi ng the country, w hi ch i n turn te nds to re duce the demandfor
importsaswell asfordomesticgoods.●Reductionindomesticdemeansholdsdowntherateofinflationorreduces
pricesw hi ch make s i mporte d arti cl e s l e ss attracti ve and make s the de f e ct co
untry’s exportsmoreattractivetoforeigners.Thus,importiscurtailedandexportexpanded.
● Under dearmoneypolicy,higherinterestratesmake it less attractive for foreigncountriestoborrow
fromthedefectcountryandinducethemtoinvestthere.

18. ► Full Employment
In unde r de ve l ope d countri e s, the f ul l e mpl oyme nt obj e cti ve i s more cruc
i al , because such economies have bothunemploymentandunderemploymentopenanddisguised. In less
developed countries, though full employment cannot be achievedwithin a short period, the
monetary policy should try to achieve at least a near fullemployment situation.
Full employmentobjective of monetarypolicyhascertainfar-reachingbeneficialeffects:●Fullemployment
can maintain a high level of aggregate effective demand, andtherebycanironoutcyclical fluctuations,
stagnationandunderconsumptiontrap.●Beforefull employment is achieved, investment can be made in
excessof savingandaprice increase ina slow rate is permissible.These willgive incentive forthefuller
utilization of resources andforhigherincome,outputandemployment.● The creation of full employment
conditionwill almostautomatically,lead to themaximization of social and economic welfare of the
society because the resourceswould be used fully and
effectively.● Ful l e mpl oyme nt w i l l , accordi ng to Ei nzi g, l e ad to i ncre ase produ
cti vi ty of workers, because the workers are not sacred of unemployed situation. The
relation betweenlaborandcapitalwouldbeidealandall-roundefficiencywillincrease.
► Economic Growth
Thiscomparativelyarecentobjectofmonetarypolicy.Ifreferstothegrowthofrealincome or output per capita.
Monetary policy can contribute to economic growth inthefollowingways:● It can maintain a balance
between monetary demand and supply of goods, and itcan also supply money is such a way as is
consistent with the supply of goods andservices.
● It can create atmosphere in which a higher rate of saving and investment would be generated.●
Monetarypolicyminimizesfluctuationinbusinessactivityandprices.●Itcreatesstabilityforgrowth.● It influences
the rate of interest, investment and the use of credit in the most productivechannelsinthe
economy.● When necessary, it expands credit and when it is not necessary, if restricts
theflow of credit. It creates saving intuitions and monetization in the saving
of thecommunity towards productive
investment.● Monetary policy gives guidance, looks after monetization in the unorganiz
edsectorandcontrolstheactivesofthefinancialintermediaries.
► Neutrality of Money
Neutralityofmoneyindicatesasituationinwhichchangesinthequantityofmoneyoccursinsuchawayastocausea
proportionatechangeintheequilibriumpricesofcommodities, and the equilibrium rate of interest remains
unchanged. If money isneutral, an increase or decrease in the quantity of money will
both produce anddisturbing effects in the economy. Neutrality of money does not
mean constantmoney supply, means that the effect of changed money supply on real variables
intheeconomywouldbeneutral.
► Balance of Payment Equilibrium

19. Balanceofpaymentequilibriumconditionisapositionatwhichacountryrepaiditsdebts and has attained an
adequate reserve at zero balance over time. This
mainobj e cti ve on mone tary pol i cy has be come si gni f i cant i n the pose -
pe ri od. It i srealized that the existence of balance of payment deficit seriously reduces the abilityof an
economy to attain other objectives. So, monetary pol icy must make intoconsiderationthe
internationalpaymentproblem.