...of the term paper Monetary Policy Reason of publishing 04 Types of Monetary Policy 05 Monetary Policy in Bangladesh 06 Tools & Strategy of Monetary Policy 06 Major tools used by Bangladesh Bank 07 Policy Target 12 Limitations of Monetary Policy 13 Findings of the study Chapter-03 03 Scope & Objective of Monetary Policy Chapter- 02 03 14 Conclusion 14 Bibliography 14 Chapter- 01 Introduction “Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by loIring interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. In this report I tried to show that how monetary policy is related to the economy...
Words: 3927 - Pages: 16
...RBI & Its Monetary Policies Table of Contents NO. | Particulars | 1. | Introduction of RBI | 2. | Monetary policy | 3. | Monetary policy objectives | 4. | Monetary policy functions | 5. | Operations of Monetary policy * Quantitative credit control * Selective or qualitative methods | 6. | Operating procedures of Monetary policy * Liquidity adjustment facility (LAF) * Market stabilization scheme | 7. | Monetary policy tools | 8. | Recent changes in Monetary policy | 9. | Evaluation of Monetary policy | 10. | Limitations | 11. | Conclusion | 12. | Bibliography | 13. | | 14. | | 15. | | 16. | | INTRODUCTION OF RBI The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government...
Words: 6452 - Pages: 26
...The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka C.Amarasekara 1 Abstract Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth. The...
Words: 18533 - Pages: 75
... 3 1. Introduction 4 2.1. Expansionary Monetary Policy 5 2.2. Contractionary Monetary Policy 6 2. Overview of the United States Monetary Policy 7 2.1 Overview of Recent United States Monetary Policy 8 3. Recent (2011) Direction of Monetary Policy 10 4. Market Reaction to Monetary Policy 12 5. Conclusion 15 6. Reference List 16 1.0 Introduction In macroeconomics, monetary policy is an importance tool to Central Bank and is a policy set by the members of Central Bank. It is an economic strategy chosen by government that authorizes Central Bank to regulate and influence the economic activity by controlling the monetary base flow into national economy. The goals of monetary policy are to promote growth of the economy, stability of prices and reduce unemployment rate. Monetary policy can be classified into two categories, namely expansionary monetary policy and contractionary monetary policy. Although, the objective for the two policies is the same, they adopt different approaches in reaching this objective. Expansionary monetary policy is used when a country is facing a recession in the economy business cycle, whereby it increases the money supply in economy system to meet its objectives. In contrast, where there is a peak in the economy business cycle, central bank will use contractionary monetary policy to reduce the money supply in economy system so as to retard the inflation...
Words: 3702 - Pages: 15
...treated the monetary policy of USA and Europe, what institutions they have and what the objectives are. It will be compared the first one with the second one. On the second part of this report, it will speak about the last news about raising the legal limit of USA debt and how this affects to the rest of the world. Finally, when the each monetary policy is clear, it will be given my own opinion. First of all, it should start defining what monetary policy is: Monetary policy is a central bank’s use of either the money supply and/or interest rates to influence economic activity (Froyen, Richard (2009). Macroeconomics Theories and Policies. Pearson Prentice Hall). Monetary policy is run by the Federal Reserve in the United States and by the European Central Bank (ECB) in Europe. The mean objective of the first institution is to insure price stability and full employment; meanwhile, for the second one is price stability. They are the responsible institutions for issuing Money. The ECB focus on price stability because, accordingly with this institution, it cannot control anything more. However, I do not believe that. Everything is linked and, by economics decisions (interest, taxes…), is possible to change different variables which influence, for example, the employment. Even so, it is true that the ECB have in consideration the employment and a sustainable and non-inflationary growth. The European Central Bank by fixing interest rates in the short-term, monetary policy influences...
Words: 341 - Pages: 2
...Monetary Policy Just what is Monetary Policy? Well, dependant upon to whom the question is being posed, the answer may slightly vary, but all in all the principle itself is still the same. Monetary policies are basically practices set forth to govern and ensure the stability, and growth of our economy. The Federal Reserve Board of Governors, who operates the Federal Reserve System, currently enacts such policies. Obtaining economic stability and growth requires the promotion of a healthy balance between consumer spending and inflation which can be achieved by understanding the history of how and why the Federal Reserve originally came to be, the basic tools used in Monetary Policy, and the administration and regulations set forth of such policies towards banks by the Federal Reserve. Prior to the Federal Reserve System, in the 1700s -1913, a more liberal approach to banking existed in the United States. During this period the banking system had primarily consisted of a large group of unrelated and unregulated banks with unrelated currency and no medium to clear it. However, the major problems imposed upon the economy, as a result of the lack there of such needed relativity, were all relative to the one simple fact: The current banking system was not doing its job and immediate action was needed. The banks playing a major role serving as a conduit for social and economic policy at the time were unreliable, and the economy reflected just that. The bank’s depositors...
Words: 1047 - Pages: 5
...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, and (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. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy. Expansionary Monetary Policy: Expansionary policy increases the total supply of money in the economy, and policy is traditionally used to combat unemployment in a recession by lowering interest rates. Contractionary Monetary Policy: Contractionary policy decreases the total money supply. and involves raising interest rates in order to combat inflation. Introduction: Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century...
Words: 2156 - Pages: 9
...Monetary policy in Kazakhstan 5. The monetary policy stance remains appropriate. Notwithstanding recent hikes in administered utility prices, inflationary pressures and growth in monetary aggregates have been relatively contained. With projected headline inflation hovering around the midpoint of the objective range (6-8 percent) and core inflation stable, the National Bank of Kazakhstan (NBK) is expected to keep its policy interest rate on hold in the coming months. This stance may need to be reevaluated if excess liquidity in the banking system translates into more rapid private sector credit expansion or if fiscal policy turns out looser than currently expected. 7. Strengthening monetary policy further will require introducing a policy rate that signals better the stance of policy and enhancing the communication strategy. The official refinancing rate, the NBK’s policy interest rate, has played little role in guiding key market interest rates. The envisaged repo instrument could become the new policy rate (preferably within a narrower interest rate corridor) to guide better key money market rates, hence bolstering the signaling effects of monetary policy. Moreover, to anchor expectations about policy intentions and operations, the NBK should communicate more openly and clearly the transition plans to active OMOs, and more generally elaborate on the factors guiding the interest rate and exchange rate intervention decisions in the NBK’s post-meeting communiqué and quarterly...
Words: 296 - Pages: 2
...Monetary Policy Design in a DSGE Model 1. A simple model 1.1 Households The utility function of a representative household is ∞ ⎛ ξ C1−σ L1+η ⎞ Et ∑ β s ⎜ t + s t + s − t + s ⎟ 1+η ⎠ s =0 ⎝ 1−σ (1) The dynamics of the demand shock is ζ t = ζ t −1 + eζ ,t , where ξt = eζ . The consumption is t θ −1 ⎡ 1 ⎤ θ −1 composed of lots of goods. It is composed in a CES function Ct = ⎢ ∫ Ct (i ) θ di ⎥ . The i =0 ⎣ ⎦ 1 1−θ 1−θ consumer price index is P = ⎡ ∫ P (i ) di ⎤ . Then the demand function of each good is t t ⎢ i =0 ⎥ ⎣ ⎦ 1 θ ⎡ P (i ) ⎤ Ct (i ) = ⎢ t ⎥ Ct ⎣ Pt ⎦ The budget constraint is −θ PCt + Bt = Wt Lt + Π t + Rt −1 Bt −1 t The first order condition for Ct , Lt , and Bt are Ct−σ = λt Pt Lη = λtWt t λt = Rt λt +1|t After some calculation, we have the Euler equation and labor supply equation ξt +1Ct−+σ / Pt +1 1 β Rt Et =1 −σ ξt Ct / Pt ξt Ct−σ Pt 1.2 Firms (2) = Lη t Wt (3) Assume there is a type of price stickiness in the economy, that each firm has a probability φ that cannot change its price, and fixed the level as the last time. And it has a probability 1 − φ that can re-optimal its price. The problem of a firm which can re-optimal its price in time t is 1 Et ∑ (βφ ) s Λ t + s [ Pt* (i )Yt (i ) − Wt Lt (i )] s =0 ∞ ⎡ Pt * ⎤ s.t.Yt + s (i ) = ⎢ ⎥ Ct and Yt (i ) = At Lt (i ) ⎣ Pt + s ⎦ The dynamics of the technology shock is at = ρ a at −1 + ea ,t , where at = ln( At ) . The first order condition is ...
Words: 1198 - Pages: 5
...EFFECT OF MONETARY POLICY ON THE ECONOMY OF PAKISTAN Submitted To: Sir Ahsan Shakil GROUP MEMBERS: ZIAD ASGHAR B-16703 WALEED BIN AAMIR B- 18992 SAIF UD DIN AHMED B-18993 EFFECT OF MONETARY POLICY ON THE ECONOMY OF PAKISTAN What is Monetary Policy? Monetary policy is how central banks manage the money supply to guide healthy economic growth. This policy is adopted by the central bank of an economy in order to control and regulate the money supply often altering or interest rate to ensure price stability and general trust in the currency. It also deals with the both the lending and borrowing rates of interest of the banks. Objectives of Monetary Policy: 1) Price Stability or Control of Inflation: Monetary policy is better suited to the achievement of price stability that is, containing inflation. Price stability means reasonable rate of inflation. 2) Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. 3) Full Employment: Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because unemployment leads to wastage of potential output, but...
Words: 936 - Pages: 4
...------------------------------------------------- Slide #1—Monetary Policy: An Introduction Most central banks have the long-run primary goal of “price stability”. In order to achieve such goal, monetary policy is implemented whenever needed in order to promote sustainable growth and low inflation in the economy. Monetary policy exerts its influence on real economic activities through various channels over time, with some changes taking place almost immediately and some taking a long period of time to come up to the surface. An in-depth understanding of these various channels through which the monetary policy transmits itself is essential to make the implementation of the policy most effective and efficient. This presentation seeks to give an overview of these five key transmission channels, and their implications on the economic activities of Korea and the United States. ------------------------------------------------- Slide #2—Transmission Mechanism of the Monetary Policy The monetary transmission mechanism, as the diagram here on the slide illustrates, is the process through which changes in monetary policy instruments such as monetary aggregates or short-term policy interest rates affect the rest of the economy and, in particular, output—real production—and inflation. The monetary policy affects output and prices through its influence on key financial variables such as interest rates, asset prices, exchange rates, and credit, and although not a financial variable...
Words: 308 - Pages: 2
...Monetary Policy Todd Underwood ECO/212 13 July 2011 Tulin Melancon Monetary Policy Money, Money, Money -- what is it all about? To quote Charles Dickens "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery." Purpose and Function of Money Money is a generally accepted method of payment for goods and services including repayment of debts. The functions of money include a medium of exchange, which is an alternative means used in trade to avoid the inconveniences of the barter system. Money also functions as a unit of account, which is a standard monetary unit of measurement of value and cost of goods, services, or assets. As one of three well-known functions of money, it provides meaning to profits, losses, liability, or assets. Another function of money is as a store of value, which means it can be saved and used at a later time, and be predictably useful when used. Any kind of object or secure verifiable record that fulfills these functions can serve as money Central Bank Management of the Monetary System The central bank plays an important role in keeping the nations economy running smoothly. The bank provides management of the supply of money and credit and with currency and payment services like electronic funds transfers and check clearing. The central bank also serves as the “banker” for the United States federal government by providing...
Words: 747 - Pages: 3
...investigates the effects of Monetary policy on some significant economic variables like exchange rate, gross domestic product and inflation using data from 1960-2010 to analyze the results. We have taken the data in percentage form. A great number of empirical studies on the relationships of monetary policy and inflation are available and most of these have analyzed the effectiveness of monetary policy in controlling inflation in Pakistan. In this paper we have presented the effectiveness of monetary policy it’s framework and data estimation through which we reached to the conclusion that monetary shocks do affect real variables like GDP, inflation and exchange rate. Pakistan has been estimated by a number of researchers and it has been recognized that monetary phenomenon are responsible for the high levels of inflation. Keywords: Monetary Policy, Inflation, Exchange rate, Economic Growth, Gross domestic product and Pakistan. Introduction This paper attempts to examine the long-run effects of Monetary Policy on several economic variables such as inflation, economic growth that is gross domestic product and exchange rate in Pakistan. For this purpose, analysis have been employed for the period 1960-2010. As monetary policy actions affect policy variables with a significant gap and with high degree of unpredictability and insecurity, it is key to predict the probable impact and degree of monetary policy actions on the real variables. Usually, policy makers and central banks...
Words: 2772 - Pages: 12
...What is monetary policy? Monetary policy is what central banks use to manage the supply of money in the economy. The money supply is the total amount of money, including cash, credit and money market mutual funds. The important part of money supply is credit, which includes loans, bonds, mortgages, and other agreements to repay. The size and rate of growth of the money supply are controlled by central banks, currency board or major regulatory boards, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the bank reserves. For example, the Federal Reserves use contractionary monetary policy to offset the Federal Government's expansionary fiscal policy. Singapore’s monetary policy Singapore Dollar is the bedrock and the lifeline of this trade. Foreign companies wishing to purchase goods and services manufactured in Singapore will have to first purchase the SGD with their home currency and exchange SGD for goods and services. Because of this, Singapore currency is capable of floating freely and in which MAS( Monetary Authority of Singapore) will still continue to monitor the strength of SGD( Singapore Dollar) based on $SNEER(S$NEER is the Singapore Dollar Nominal Effective Exchange Rate). Thus, Monetary Authority of Singapore (MAS) is in charge of Singapore’s monetary policy in which it is also entrusted to promote monetary stability, and credit and exchange...
Words: 310 - Pages: 2
...To what extent is monetary policy the most effective way of stimulating economic growth? Refer to at least one example of a developed economy in your answer. (30 marker) Monetary policy is the actions of a central bank, currency board or other regulatory committee, usually the MPC, that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves). The primary way of promoting economic growth is the manipulation of interest rates. Lowering the interest rates, have a significant affect on the Aggregate Demand of country, most significantly consumption. An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from lenders. If an interest rate is low, then the return from saving becomes less. As a result, a lower interest rate promotes an increase in consumption, whilst discouraging increased savings. Consumption makes up 60% of Aggregate Demand, so an increase in consumption will most likely lead to an increase in AD. As shown on the diagram, shifting from AD-AD1, leads to an increase in Real Output from Y-Y1, which will stimulate economic growth. However, following the financial crash the UK set a base interest rate of 0.5% and it has remained at the level since. As a result, it is...
Words: 568 - Pages: 3
