Monetary Policy

1. Monetary Policy

2. What is Monetary Policy….???
Monetary Policy is the process by
which the monetary authority of a
country controls the supply of money,
often targeting the interest rate for the
purpose of promoting economic growth
and 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.”

3. 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.

4. Objectives of Monetary Policy….
There are basically three
major objectives of
monetary Policy. Which are:-
 To ensure price stability.
 To encourage economic
growth.
 To ensure stability of exchange
rate of money.

5. Scope of Monetary Policy….
Monetary decisions today take into account a widen
range 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,

6. Importance of Monetary
Policy……
 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.
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7. Tools of Monetary Policy….
There are four basic tools or instruments of
monetary policy which can be used to achieve
economic & price stability by influencing aggregate
demand or spending in the economy .These tools are:-
 Open market operation.
 Changing the bank rate.
 Changing the cash reserve ratio.
 Undertaking selective credit controls.

8. Expansionary Monetary Policy…
The following three monetary policy
measures are adopted as a part of an
expansionary monetary policy to cure
recession & to establish the
equilibrium of national income at
full 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

9. Tight Monetary Policy…
The following monetary measures
generally adopted as tight monetary
policy 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

10. MONETARY POLICY :KEYNESIAN VIEW
EXPANSIONARY MONETARY POLICY TIGHT MONETARY POLICY
Problems : Recession & Unemployment
Measures :
1. Central bank buys securities through
open market operation
2. It reduces CRR
3. It lowers bank rate
Problem : Inflation
Measures :
1. Central bank sells securities through
open market operation
2. It raises CRR & SLR bank rate
3. It raises maximum margin against
holding of stocks of goods
Money supply increase
Interest rate falls
Investment increase
Aggregate demand increase
Aggregate output increase
Money supply decrease
Interest rate decrease
Investment expenditure declines
Aggregate demand declines
price level falls

11. 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.

12. 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.

13. Limitations of Monetary Policy in
developing Countries
In 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.

14. THANK YOU