Transcript Objective of MP - qazieconometrics

Monetary Policy
policy may be defined as “that branch of
economic policy which is concerned with the regulation
of the availability (or supply), the costs and the directions
of credit”. It is effected by various techniques (methods)
in the hands of the central bank.
► Monetary
Objective of MP
► The objective of credit control or monetary policy have
been different at different times in different countries
according to the economic situations and problems faced
by them.
Objective of MP
► Before World War 1 (1914), the maintenance of the
exchange rate stability was the main objective and after
this War the control of inflation become more
important.
Objective of MP
► During the Great Depression (1929-34) the control of
deflation/depression assumed more significance.
► In World War II (1939) full employment began to be
given the greatest importance. After World War II the
emphasis was full-employment without inflation.
Objective of MP
► In the modern times economic development with
monetary stability is accepted as the most important
goal of credit control.
► The main objective of this credit control function is to
save the economy from inflation and deflation and to
stabilize the economy and prices.
Instruments of Monetary policy
► Quantitative
►
Qualitative
Quantitative
► Bank rate policy/ official rate policy.
►
Open market operation.
► Variable reserve ratio
► Credit rationing
Bank rate policy/ official rate policy.
► Rate of interest at which the central bank grant credit
to other banks.
► When bank rate is raised, other bank’s interest/return
rates on advances also move up. ( Monetary expansion
decrease)
► When bank rate is decreased other bank’s interest
rate/return rates on advances also go down. ( Monetary
expansion increase)
Open Market Operation
► Buying and selling of government securities by the
central bank with a view to influencing money supply is
called open market operation.
Open Market Operation
► When central bank sells securities to buyers make
payment for these to the central bank. As result the
lending and financing power of banks decreases which
leads to reduction in the rate of credit expansion.
Variable Reserve Ratios
► The amount of money which the banks are legally
required to keep with the central bank is termed legal
cash reserve ratio or requirement. It is certain
percentage of deposit.
Liquidity Ratios
► In Pakistan liquidity ratio refers to the amount of assets
which banks are legally required to hold in the forms of
► Cash in hand
► Balances with SBP/NBP
► Approved Securities.
Qualitive
►
Moral Suasion
By virtue of its special position, the central bank
can persuade commercial banks to follow a
specific credit policy. In this connection the
central bank employ oral or written appeals or
warnings.
Publicity
Channels of monetary policy
► A central bank derives the power to determine a
specific interest rate in the wholesale money markets
from the fact that it is the monopoly supplier of ‘highpowered’ money, which is also known as ‘base money’.
►
Bank chooses the price at which it will lend highpowered money to private sector institutions.
► The quantitative effect of a change in the official rate
on other interest rates, and on financial markets in
general, will depend on the extent to which the policy
change was anticipated and how the change affects
expectations of future policy.
►
►
An increase in the money supply lowers the real
interest rate, which in turn stimulates investment and
therefore GDP.
Asset prices
► Changes in the official rate also affect the market value
of securities, such as bonds and equities. The price of
bonds is inversely related to the long-term interest rate,
so a rise in long-term interest rates lowers bond prices.
The exchange rate
► Policy-induced changes in interest rates can also affect
the exchange rate. The exchange rate is the relative
price of domestic and foreign money, so it depends on
both domestic and foreign monetary conditions.
► However, other things being equal, an unexpected rise
in the official rate will probably lead to an immediate
appreciation of the domestic currency in foreign
exchange markets.
► The exchange rate appreciation follows from the fact
that higher domestic interest rates, relative to interest
rates on equivalent foreign-currency assets, make
sterling assets more attractive to international investors.
►
The exchange rate should move to a level where
investors expect a future depreciation just large enough
to make them indifferent between holding sterling and
foreign-currency assets.
Expectations and confidence
► Official rate changes can influence expectations about
the future course of real activity in the economy, and
the confidence with which those expectations are held.
►
Such changes in perception will affect participants in
financial markets, and they may also affect other parts
of the economy via, for example, changes in expected
future labour income, unemployment, sales and profits.
Fiscal Policy
►
It refers to adjustment in government revenue
and expenditure to attain various macro
economic goals, e.g.
► Full employment
► Economic stability
► Economic development