Monetary Policy

professor & Lawyer

Puttu Guru Prasad
Senior Faculty for
Management Studies
VVIT - Nambur
 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
objective
Objectives are classified in two aspects

Under developed countries

Developed countries
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
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
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
 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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Targets for monetary policy:

Employment, economic growth, and ination 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.
Targets for monetary policy
Targets for monetary policy
Money Supply targeting
 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
Monetary policy of State Bank of Pakistan 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
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.
 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
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
 THANK
YOU