SlideShare una empresa de Scribd logo
1 de 20
Descargar para leer sin conexión
Module 3




Thursday, January 24, 2013   NVK   1
    Monetary policy is the process by which the
     government, central bank or monetary authority of a
     country controls
 (i) the supply of money
 (ii) availability of money
 (iii) cost of money or rate of interest
     in order to attain a set of objectives oriented
     towards the growth and stability of the economy



Thursday, January 24, 2013   NVK                           2
    To ensure a stable currency value
    Price stability
    Economic stability or full employment
    Rapid economic growth
    Balance of payments equilibrium
    Greater equality in distribution of
        income & wealth


Thursday, January 24, 2013   NVK             3
    To maintain continuously low rate of interest
    To create a continuous market for
     government securities
    To provide credit at differential rate of interest




Thursday, January 24, 2013   NVK                          4
 There is convergence of views in developed and
  developing economies, that price stability is the
  dominant objective of monetary policy.
 Price stability does not mean complete year-to-year
  price stability which is difficult to attain.
 Price stability refers to the long run average stability
  of prices.
 Price stability involves avoidance of both inflationary
  and deflationary pressures.


Thursday, January 24, 2013   NVK                             5
    Price Stability contributes improvements in the
       standard of living of people.
      It promotes saving in the economy while
       discouraging unproductive investment.
      Stable prices enable exports to compete in
       international markets and contribute to the
       strengthening of BoP.
      Price stability leads to interest rate stability, and
       exchange rate stability (via export import stability).
      It contributes to the overall financial stability of the
       economy.



Thursday, January 24, 2013   NVK                                  6
 It depends mainly on two factors
             1. level of monetized economy
             2. level of development of capital
                  market




Thursday, January 24, 2013   NVK                  7
Expansionary policy
    expansionary policy increases the total supply of money in
     the economy
    used to combat unemployment in a recession by lowering
     interest rates.


Contractionary policy
    contractionary policy decreases the total money supply
    involves raising interest rates in order to combat inflation
    increasing interest rates slows the economy by making funds
     more expensive to firms, and promotes consumer savings
     which decreases revenues by firms.

Thursday, January 24, 2013   NVK                                    8
 Open market operations
 Bank rate
 Variable reserve ratio




Thursday, January 24, 2013   NVK   9
    Open Market Operations involve buying
     (outright or temporary) and selling of
     government securities by the central
     bank, from or to the public and banks.




Thursday, January 24, 2013   NVK              10
Open-Market Operations
 Buying Securities
 From commercial banks...
 Bank gives up securities
 RBI pays bank
 Banks have increased reserves
 From the public...
 Public gives up securities
 Public deposits check in    bank
 Banks have increased reserves
Buying increases the money supply and lowers
  rates

Thursday, January 24, 2013   NVK               11
 Selling Securities
     To commercial banks...
 RBI gives up securities
  Bank pays for securities
  Banks have decreased reserves
 To the public...
 RBI gives up securities
  Public pays by check from bank
  Banks have decreased reserves
Selling decreases the money supply and
  increases rates
Thursday, January 24, 2013   NVK         12
    Banks are required to maintain a certain
     percentage of their deposits in the form of
     reserves or balances with the RBI
    It is called Cash Reserve Ratio or CRR
    Since reserves are high-powered money or
     base money, by varying CRR, RBI can reduce
     or add to the bank’s required reserves and
     thus affect bank’s ability to lend.


Thursday, January 24, 2013   NVK                   13
    Raising the Reserve Ratio
       Banks must hold more reserves
       Banks decrease lending
       Money supply decreases
    Lowering the Reserve Ratio
       Banks may hold less reserves
       Banks increase lending
       Money supply increases

Thursday, January 24, 2013   NVK        14
    Discount rate is the rate of interest charged by the
     central bank for providing funds or loans to the banking
     system.
    Funds are provided either through lending directly or
     rediscounting or buying commercial bills and treasury
     bills.
    Raising Bank Rate raises cost of borrowing by
     commercial banks, causing reduction in credit volume to
     the banks, and decline in money supply.
    Variation in Bank Rate has an effect on the domestic
     interest rate, especially the short term rates.
    Market regards the increase in Bank rate as the official
     signal for beginning of a tight money situation.
Thursday, January 24, 2013   NVK                                15
Instruments
1. Discount Rate
   (Bank Rate)

2.Reserve Ratios                 Operating
                                 Target
3. Open Market
   Operations
                                 • Monetary Base
                                 • Bank Credit      Intermediate
                                 • Interest Rates   Target
                                                    •Monetary
                                                    Aggregates(M3)
                                                                     Ultimate
                                                    •Long term       Goals
                                                    interest rates
                                                                     •Total Spending
                                                                     • Price Stability
                                                                      Etc.
    Thursday, January 24, 2013     NVK                                              16
 Credit Rationing
 Change in lending margins
 Moral Suasion
 Direct Controls




Thursday, January 24, 2013   NVK   17
MONETARY POLICY AND EQUILIBRIUM GDP
                                                                 Sm1 Sm2 Sm3
                                                                                                               Investment
                                                                                                                Demand


                    Real rate of interest, i
                                               10                                             10


                                               8                                              8


                                               6                                              6
                                                                                      Dm
                                               0                                              0
                                                    Quantity of money demanded and supplied        Amount of investment, i

                                                                             AS           If the Money Supply
                                                                                          Increases to Stimulate
                                                                                          the Economy…
                                                                                          Interest Rate Decreases
                   Price level




                                               P3
                                                                                          Investment Increases
                                               P2                                         AD & GDP Increases
                                               P1                         AD3(I=$25)       with slight inflation
                                                                         AD2(I=$20)       Increasing money supply
                                                                        AD1(I=$15)         continues the growth –
Thursday, January 24, 2013
                                                       Real domestic output, GDP
                                                        NVK
                                                                                           but, watch Price Level. 18
 Time lag
     1. Recognition lag
     2. Action lag
     3. Effect lag
 Problem in forecasting
 Non Banking financial Intermediaries
 Under development of money and Capital
  Markets

Thursday, January 24, 2013   NVK           19
Thursday, January 24, 2013   NVK   20

Más contenido relacionado

La actualidad más candente

Monetory policy
Monetory policyMonetory policy
Monetory policyhiten91
 
Monetary Policy Effectiveness of monetary policy to combat inflation: India e...
Monetary Policy Effectiveness of monetary policy to combat inflation: India e...Monetary Policy Effectiveness of monetary policy to combat inflation: India e...
Monetary Policy Effectiveness of monetary policy to combat inflation: India e...MD SALMAN ANJUM
 
Monetary policy (theoritical)
Monetary policy (theoritical)Monetary policy (theoritical)
Monetary policy (theoritical)Jannatul Ferdous
 
Monetary policy in India a brief
Monetary policy in India a briefMonetary policy in India a brief
Monetary policy in India a briefRobin Patni
 
Monetary policy of india 2013
Monetary policy of india 2013Monetary policy of india 2013
Monetary policy of india 2013ARJUN RAJAN KAUL
 
Impact of monetary policy on industrial growth
Impact of monetary policy on industrial growthImpact of monetary policy on industrial growth
Impact of monetary policy on industrial growthUdit Jain
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary PolicyAIT
 
monetary policy
monetary policymonetary policy
monetary policymeriid007
 
Monetary policy of RBI
Monetary policy of RBI Monetary policy of RBI
Monetary policy of RBI Chetanya Nagar
 
Monetary policy of RBI
Monetary policy of RBIMonetary policy of RBI
Monetary policy of RBIRasik Jani
 

La actualidad más candente (20)

Monetory policy
Monetory policyMonetory policy
Monetory policy
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary Policy
 
Monetary Policy Effectiveness of monetary policy to combat inflation: India e...
Monetary Policy Effectiveness of monetary policy to combat inflation: India e...Monetary Policy Effectiveness of monetary policy to combat inflation: India e...
Monetary Policy Effectiveness of monetary policy to combat inflation: India e...
 
Monetary policy (theoritical)
Monetary policy (theoritical)Monetary policy (theoritical)
Monetary policy (theoritical)
 
Monetarypolicy
Monetarypolicy Monetarypolicy
Monetarypolicy
 
Monetary policy in India a brief
Monetary policy in India a briefMonetary policy in India a brief
Monetary policy in India a brief
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Monetary policy of india 2013
Monetary policy of india 2013Monetary policy of india 2013
Monetary policy of india 2013
 
Monetary System Of Pakistan
Monetary System Of PakistanMonetary System Of Pakistan
Monetary System Of Pakistan
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Monetory policy
Monetory policyMonetory policy
Monetory policy
 
Impact of monetary policy on industrial growth
Impact of monetary policy on industrial growthImpact of monetary policy on industrial growth
Impact of monetary policy on industrial growth
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Topic 12 - Monetary Policy
Topic 12 - Monetary PolicyTopic 12 - Monetary Policy
Topic 12 - Monetary Policy
 
PPT- BSP ECon 151
PPT- BSP ECon 151PPT- BSP ECon 151
PPT- BSP ECon 151
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary Policy
 
monetary policy
monetary policymonetary policy
monetary policy
 
Monetary policy of RBI
Monetary policy of RBI Monetary policy of RBI
Monetary policy of RBI
 
Monetary policy of RBI
Monetary policy of RBIMonetary policy of RBI
Monetary policy of RBI
 

Destacado

Monitary and fiscal policy
Monitary and fiscal policyMonitary and fiscal policy
Monitary and fiscal policyRoshan Paudel
 
Wto Global And Inflation In China 2000
Wto Global And Inflation  In China 2000Wto Global And Inflation  In China 2000
Wto Global And Inflation In China 2000mkalina
 
Inflation , causes and effetcs
Inflation , causes and effetcsInflation , causes and effetcs
Inflation , causes and effetcsSoftSol
 
Impact of macro economic factors on money supply
Impact of macro economic factors on money supplyImpact of macro economic factors on money supply
Impact of macro economic factors on money supplyDEVIKA S INDU
 
MACROECONOMICS-CH4
MACROECONOMICS-CH4MACROECONOMICS-CH4
MACROECONOMICS-CH4kkjjkevin03
 
Which life is better arrange or love marriage
Which life is better arrange or love marriageWhich life is better arrange or love marriage
Which life is better arrange or love marriageWedeterna
 
Idea Cellular IIM Lucknow Strategy
Idea Cellular IIM Lucknow StrategyIdea Cellular IIM Lucknow Strategy
Idea Cellular IIM Lucknow StrategyVaibhav Sathe
 
R3 2017 China Media Inflation Trend Report Slideshare
R3 2017 China Media Inflation Trend Report SlideshareR3 2017 China Media Inflation Trend Report Slideshare
R3 2017 China Media Inflation Trend Report SlideshareR3
 
Presentation on arrange marriage
Presentation on arrange marriagePresentation on arrange marriage
Presentation on arrange marriage774474
 
Introduction to Consumer Behavior
Introduction to Consumer BehaviorIntroduction to Consumer Behavior
Introduction to Consumer BehaviorMaxwell Ranasinghe
 
Love Marriage VS Arrange Marriage
Love Marriage VS Arrange MarriageLove Marriage VS Arrange Marriage
Love Marriage VS Arrange MarriageYasar Hayat
 
Monetary and Fiscal Policy
Monetary and Fiscal PolicyMonetary and Fiscal Policy
Monetary and Fiscal PolicySam Georgi
 
Buying behaviour ppt
Buying behaviour pptBuying behaviour ppt
Buying behaviour pptIsha Arya
 
Monetary policy AND TYPES
Monetary policy AND TYPESMonetary policy AND TYPES
Monetary policy AND TYPESMuhammad Asad
 

Destacado (20)

Monitary and fiscal policy
Monitary and fiscal policyMonitary and fiscal policy
Monitary and fiscal policy
 
consumer behaviour
consumer behaviourconsumer behaviour
consumer behaviour
 
Wto Global And Inflation In China 2000
Wto Global And Inflation  In China 2000Wto Global And Inflation  In China 2000
Wto Global And Inflation In China 2000
 
Inflation , causes and effetcs
Inflation , causes and effetcsInflation , causes and effetcs
Inflation , causes and effetcs
 
Impact of macro economic factors on money supply
Impact of macro economic factors on money supplyImpact of macro economic factors on money supply
Impact of macro economic factors on money supply
 
Ppt on idea cellular
Ppt on idea cellularPpt on idea cellular
Ppt on idea cellular
 
MACROECONOMICS-CH4
MACROECONOMICS-CH4MACROECONOMICS-CH4
MACROECONOMICS-CH4
 
Which life is better arrange or love marriage
Which life is better arrange or love marriageWhich life is better arrange or love marriage
Which life is better arrange or love marriage
 
INFLATION
INFLATIONINFLATION
INFLATION
 
Idea: case study
Idea: case studyIdea: case study
Idea: case study
 
Love Vs Arranged Marriage
Love Vs Arranged MarriageLove Vs Arranged Marriage
Love Vs Arranged Marriage
 
Idea Cellular IIM Lucknow Strategy
Idea Cellular IIM Lucknow StrategyIdea Cellular IIM Lucknow Strategy
Idea Cellular IIM Lucknow Strategy
 
R3 2017 China Media Inflation Trend Report Slideshare
R3 2017 China Media Inflation Trend Report SlideshareR3 2017 China Media Inflation Trend Report Slideshare
R3 2017 China Media Inflation Trend Report Slideshare
 
Presentation on arrange marriage
Presentation on arrange marriagePresentation on arrange marriage
Presentation on arrange marriage
 
Introduction to Consumer Behavior
Introduction to Consumer BehaviorIntroduction to Consumer Behavior
Introduction to Consumer Behavior
 
Love Marriage VS Arrange Marriage
Love Marriage VS Arrange MarriageLove Marriage VS Arrange Marriage
Love Marriage VS Arrange Marriage
 
Monetary and Fiscal Policy
Monetary and Fiscal PolicyMonetary and Fiscal Policy
Monetary and Fiscal Policy
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Buying behaviour ppt
Buying behaviour pptBuying behaviour ppt
Buying behaviour ppt
 
Monetary policy AND TYPES
Monetary policy AND TYPESMonetary policy AND TYPES
Monetary policy AND TYPES
 

Similar a Monetory policy

Monetary Policy in Bangladesh
Monetary Policy in BangladeshMonetary Policy in Bangladesh
Monetary Policy in BangladeshPantho Sarker
 
Monetary Policy in Macro Economics
Monetary Policy in Macro EconomicsMonetary Policy in Macro Economics
Monetary Policy in Macro EconomicsAqib Syed
 
Presentation to 41 club
Presentation to 41 clubPresentation to 41 club
Presentation to 41 clubJohn Clarke
 
2022 Navigate Uncertainty with the Right Asset Allocation
2022 Navigate Uncertainty with the Right Asset Allocation2022 Navigate Uncertainty with the Right Asset Allocation
2022 Navigate Uncertainty with the Right Asset AllocationQuantum Mutual Fund
 
Bonds and Interest Rates - Sri lanka
Bonds and Interest Rates - Sri lankaBonds and Interest Rates - Sri lanka
Bonds and Interest Rates - Sri lankaDhanushka Dissanayake
 
Macroeconomic MixedBag
Macroeconomic MixedBagMacroeconomic MixedBag
Macroeconomic MixedBagShree Harsha
 
Lagos Real Estate Investment Report Q3 2012
Lagos Real Estate Investment Report Q3 2012Lagos Real Estate Investment Report Q3 2012
Lagos Real Estate Investment Report Q3 2012Munachi C Okoye
 
Quantative Tightening - A Leviathan Awakens - Blake Huber.pdf
Quantative Tightening - A Leviathan Awakens - Blake Huber.pdfQuantative Tightening - A Leviathan Awakens - Blake Huber.pdf
Quantative Tightening - A Leviathan Awakens - Blake Huber.pdfBlake Huber
 

Similar a Monetory policy (20)

Broader role for monetary policy
Broader role for monetary policyBroader role for monetary policy
Broader role for monetary policy
 
Monetary Policy in Bangladesh
Monetary Policy in BangladeshMonetary Policy in Bangladesh
Monetary Policy in Bangladesh
 
Monetary Policy in Macro Economics
Monetary Policy in Macro EconomicsMonetary Policy in Macro Economics
Monetary Policy in Macro Economics
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Monetary policy
Monetary policyMonetary policy
Monetary policy
 
Lecture # 3 (30.01.2017) @ ibt monetary policy
Lecture # 3 (30.01.2017) @ ibt monetary policyLecture # 3 (30.01.2017) @ ibt monetary policy
Lecture # 3 (30.01.2017) @ ibt monetary policy
 
Monteary policy
Monteary policyMonteary policy
Monteary policy
 
Lecture # 3 @ ibt monetary policy
Lecture # 3 @ ibt monetary policyLecture # 3 @ ibt monetary policy
Lecture # 3 @ ibt monetary policy
 
Presentation to 41 club
Presentation to 41 clubPresentation to 41 club
Presentation to 41 club
 
2022 Navigate Uncertainty with the Right Asset Allocation
2022 Navigate Uncertainty with the Right Asset Allocation2022 Navigate Uncertainty with the Right Asset Allocation
2022 Navigate Uncertainty with the Right Asset Allocation
 
Bonds and Interest Rates - Sri lanka
Bonds and Interest Rates - Sri lankaBonds and Interest Rates - Sri lanka
Bonds and Interest Rates - Sri lanka
 
Macroeconomic MixedBag
Macroeconomic MixedBagMacroeconomic MixedBag
Macroeconomic MixedBag
 
Monetary Developments
Monetary DevelopmentsMonetary Developments
Monetary Developments
 
Monetary policy of bangladesh
Monetary policy of bangladeshMonetary policy of bangladesh
Monetary policy of bangladesh
 
Real one
Real oneReal one
Real one
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary Policy
 
Lagos Real Estate Investment Report Q3 2012
Lagos Real Estate Investment Report Q3 2012Lagos Real Estate Investment Report Q3 2012
Lagos Real Estate Investment Report Q3 2012
 
Quantative Tightening - A Leviathan Awakens - Blake Huber.pdf
Quantative Tightening - A Leviathan Awakens - Blake Huber.pdfQuantative Tightening - A Leviathan Awakens - Blake Huber.pdf
Quantative Tightening - A Leviathan Awakens - Blake Huber.pdf
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary Policy
 
Monetary policy of rbi
Monetary policy of rbiMonetary policy of rbi
Monetary policy of rbi
 

Monetory policy

  • 1. Module 3 Thursday, January 24, 2013 NVK 1
  • 2. Monetary policy is the process by which the government, central bank or monetary authority of a country controls  (i) the supply of money  (ii) availability of money  (iii) cost of money or rate of interest in order to attain a set of objectives oriented towards the growth and stability of the economy Thursday, January 24, 2013 NVK 2
  • 3. To ensure a stable currency value  Price stability  Economic stability or full employment  Rapid economic growth  Balance of payments equilibrium  Greater equality in distribution of income & wealth Thursday, January 24, 2013 NVK 3
  • 4. To maintain continuously low rate of interest  To create a continuous market for government securities  To provide credit at differential rate of interest Thursday, January 24, 2013 NVK 4
  • 5.  There is convergence of views in developed and developing economies, that price stability is the dominant objective of monetary policy.  Price stability does not mean complete year-to-year price stability which is difficult to attain.  Price stability refers to the long run average stability of prices.  Price stability involves avoidance of both inflationary and deflationary pressures. Thursday, January 24, 2013 NVK 5
  • 6. Price Stability contributes improvements in the standard of living of people.  It promotes saving in the economy while discouraging unproductive investment.  Stable prices enable exports to compete in international markets and contribute to the strengthening of BoP.  Price stability leads to interest rate stability, and exchange rate stability (via export import stability).  It contributes to the overall financial stability of the economy. Thursday, January 24, 2013 NVK 6
  • 7.  It depends mainly on two factors 1. level of monetized economy 2. level of development of capital market Thursday, January 24, 2013 NVK 7
  • 8. Expansionary policy  expansionary policy increases the total supply of money in the economy  used to combat unemployment in a recession by lowering interest rates. Contractionary policy  contractionary policy decreases the total money supply  involves raising interest rates in order to combat inflation  increasing interest rates slows the economy by making funds more expensive to firms, and promotes consumer savings which decreases revenues by firms. Thursday, January 24, 2013 NVK 8
  • 9.  Open market operations  Bank rate  Variable reserve ratio Thursday, January 24, 2013 NVK 9
  • 10. Open Market Operations involve buying (outright or temporary) and selling of government securities by the central bank, from or to the public and banks. Thursday, January 24, 2013 NVK 10
  • 11. Open-Market Operations  Buying Securities  From commercial banks...  Bank gives up securities  RBI pays bank  Banks have increased reserves  From the public...  Public gives up securities  Public deposits check in bank  Banks have increased reserves Buying increases the money supply and lowers rates Thursday, January 24, 2013 NVK 11
  • 12.  Selling Securities  To commercial banks...  RBI gives up securities  Bank pays for securities  Banks have decreased reserves  To the public...  RBI gives up securities  Public pays by check from bank  Banks have decreased reserves Selling decreases the money supply and increases rates Thursday, January 24, 2013 NVK 12
  • 13. Banks are required to maintain a certain percentage of their deposits in the form of reserves or balances with the RBI  It is called Cash Reserve Ratio or CRR  Since reserves are high-powered money or base money, by varying CRR, RBI can reduce or add to the bank’s required reserves and thus affect bank’s ability to lend. Thursday, January 24, 2013 NVK 13
  • 14. Raising the Reserve Ratio  Banks must hold more reserves  Banks decrease lending  Money supply decreases  Lowering the Reserve Ratio  Banks may hold less reserves  Banks increase lending  Money supply increases Thursday, January 24, 2013 NVK 14
  • 15. Discount rate is the rate of interest charged by the central bank for providing funds or loans to the banking system.  Funds are provided either through lending directly or rediscounting or buying commercial bills and treasury bills.  Raising Bank Rate raises cost of borrowing by commercial banks, causing reduction in credit volume to the banks, and decline in money supply.  Variation in Bank Rate has an effect on the domestic interest rate, especially the short term rates.  Market regards the increase in Bank rate as the official signal for beginning of a tight money situation. Thursday, January 24, 2013 NVK 15
  • 16. Instruments 1. Discount Rate (Bank Rate) 2.Reserve Ratios Operating Target 3. Open Market Operations • Monetary Base • Bank Credit Intermediate • Interest Rates Target •Monetary Aggregates(M3) Ultimate •Long term Goals interest rates •Total Spending • Price Stability Etc. Thursday, January 24, 2013 NVK 16
  • 17.  Credit Rationing  Change in lending margins  Moral Suasion  Direct Controls Thursday, January 24, 2013 NVK 17
  • 18. MONETARY POLICY AND EQUILIBRIUM GDP Sm1 Sm2 Sm3 Investment Demand Real rate of interest, i 10 10 8 8 6 6 Dm 0 0 Quantity of money demanded and supplied Amount of investment, i AS If the Money Supply Increases to Stimulate the Economy… Interest Rate Decreases Price level P3 Investment Increases P2 AD & GDP Increases P1 AD3(I=$25) with slight inflation AD2(I=$20) Increasing money supply AD1(I=$15) continues the growth – Thursday, January 24, 2013 Real domestic output, GDP NVK but, watch Price Level. 18
  • 19.  Time lag 1. Recognition lag 2. Action lag 3. Effect lag  Problem in forecasting  Non Banking financial Intermediaries  Under development of money and Capital Markets Thursday, January 24, 2013 NVK 19
  • 20. Thursday, January 24, 2013 NVK 20