2. MONETARY POLICY
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. OBJECTIVE
Objectives are classified in two aspects
Under developed countries
Developed countries
4. UNDER DEVELOPED COUNTRIES
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. DEVELOPED COUNTRIES
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. TYPES OF MONETARY POLICY
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. TOOLS OF MONETARY POLICY
Quantitative Tools
Open Market Operations
Bank Rate
Cash Reserve Requirement
Liquidity ratio
Special deposit
Qualitative Tools
Credit rationing
Credit ceiling
Moral persuasion
Direct action
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8. TARGETS FOR MONETARY POLICY:
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. OVER VIEW OF DIFFERENT ECONOMIST:
Classical Keynesians Monetarists
Demand for money is simply for Demand for money for three Demand for money related to
spending on forcible transition motives demand for holding wealth in other
Transaction forms. money is direct substitute of
Precautionary wealth
Speculative
Full employment Always full employment is not
possible
MS has a direct proportional Ms has a direct but not proportion
relationship with price relationship with price
Increase in Ms result in low (i) with increase in MS will directly change
no immediate effect on NI in NI and PT, with the V remain
constant
If people do not want to hold people will possibly invest it to earn
money, they would invest it to earn interest ,they may also use it
interest invested to buy equities or physical
assets
Wages (r) upward and downward Wages (r)upward flexible and down
flexible ward rigid
AGS is vertical AGS is positive
Laissez fair Government intervention
Saving and income are the function Saving depend on income and
of interest rate investment on interest rate
Changes in MS caused by changes Changes in MS cause changes in
in NI the money value of NI
13. VARIOUS MONETARY POLICY OF SBP IN
DIFFERENT YEARS
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. VARIOUS MONETARY POLICY OF SBP IN
DIFFERENT YEARS
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. VARIOUS MONETARY POLICY OF SBP IN
DIFFERENT YEARS
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. CONCLUSION
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
