Transcript The influences of monetary policy

Pakistan ‘s
monetary policy
Presented by:
Ambreen Jaseem
Farooq Anjum
LOGO
outline
1
Brief introduction
2
Reserve requirement
3
Interest rate
4
Open market policy
5
Brief conclusion
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Brief introduction
Definition: government actions to
increase or decrease the money supply
and change banking requirements and
interest rates to influence banker’s
willingness to make loans.
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Brief introduction
Government, central bank, monetary authority
↓
the supply of money
availability of money
cost of money
rate of interest
↓
Objective: the growth and stability of the
economy
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Brief introduction
Expansionary policy:
increase the total money supply,
combat unemployment,
lower interest rates
Contractionary policy:
Decrease the total money supply,
Combat inflation,
Raise interest rates
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Tools of monetary policy
Reserve
requirement
Interest
Open
rate
market
policy
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Reserve Requirement
(or Required Reserve Ratio)
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Definition
The reserve requirement (or
required reserve ratio) is a bank
regulation that sets the minimum
reserves each bank must hold to
customer deposits and notes.
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Reserve Requirement Changes Affect the
Money Stock
Increasing the reserve requirement
Reducing the volume of
deposits
Reducing the money stock and raises the cost of credit
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Part 2: Effects: Reserve Requirement Changes
Affect the Money Stock
Decreasing the ratios
Expansion of bank credit and deposit
levels and a decline in interest rates
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Situation in Pakistan
Pakistan has raised its
reserve requirment ratio
ten times in 2007.
8.5%
10%
11.5%
13.5%
9%
9.5%
10.5%
11%
12%
12.5%
14.5%
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To maintain the stability
of the value of the
currency
Effects
To control the currency
flow, restrain inflation
To promote the economic
growth.
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The importance of interest rate in
money policy
1.Interpreting the term
structure
2.Interpreting the term
structure
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The influnce of
changes of
interest rate
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1. Inflation
2. Investment
3. Consumption
4. Pressure of foreign exchange
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Discount rate and
rediscount rate
discount rate ：a kind of interest rate.when
individuals or industries exchange the
commercial paper （商业票据）for cash with
the commercial bank before its due date, the
bank will take off some interest from the
amount of money the commercial paper
represents and the individuals or industries
get the rest of money. And the interest rate
the bank uses is called the discount rate.
-------something to do with time value of money
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What’s the time value of money?
2007 10 yuan
2 bars of
chocolate
2008 10 yuan
only 1 bar of
chocolate
As time goes by ,the value of money decreases.---the so called time value of money
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How the discount rate influences the
value of money?
 10 yuan＝10*(1+10%)=11 yuan
(2007)
(2008)
 9.1yuan＝9.1*(1+10%)=10yuan
(2007 )
(2008)
 10 yuan ＝10*(1+10%)(1+10%)=12.1 yuan
(2007)
(2009)
 In 2007,we can buy 2 bars of chocolate with 10
yuan , while in 2008, we have to pay 11 yuan for
the same 2 bars of chocolate. the value of
money actually decreases↓
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Rediscount rate
Individua
ls or
industrie
s
Commerci
al banks
Central
bank
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rediscount rate
today
mainly refers to the
interest rate the central
bank charges commercial
banks when they borrow
money from the central
bank.
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The function of rediscount rate
Rediscount rate ↑
commercial banks’ interest rate on loan↑
individuals’ tendency to borrow money ↓
cash flow in society↓
investment of individuals and industries ↓
economy get controlled
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some figures of China’s rediscount rate from 1993
to 2003.
1993
1994
10.8
10.8
1995
1996
1997
10.44
9
8.55
1998
1999
2000
4.59
3.24
3.24
2001
2002
2003
3.24
2.7
2.7
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Open Market Operation
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Outline
Definition of open market operation
Classification of open market
operation
Importance of open market operation
Specific operations and Impact of
open market operation—how is open
market operation conducted
China’s open market operation in
2008
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What is open market operation?
Open market operations are the means
of implementing monetary policy by
which a central bank controls its
national money supply by buying and
selling government securities, or
other financial instruments. Monetary
targets, such as interest rates or
exchange rates, are used to guide this
implementation.
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Importance of open market operation
controlling the money supply
achieving and maintaining a fixed
exchange rate with relation to some
foreign currency
guiding the trend of interest rates in
the currency market
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Central Bank Bill
Central Bank Bill is short-term bond
issued by The People’s Bank of China
to retrieve the fundamental currency.
The expiration of Central Bank Bill is
characterized as handing the
fundamental currency out.
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Pakistan’s open market operation in 2008
The principal guidance is to control
the inflation and
1.preventing money supply from
increasing too rapidly
2.quickening the revaluation of foreign
exchange rate
3.raising the interest rates
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conclusion
An independent and effective
monetary policy is essential
for effective economic
management in Pakistan.
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Cl i c k t o e d i t co mp a n y s l o g a n .
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