Monetary Policy

Submitted to: submitted by: Prof. Harpreet kaur Neha verma

B.com prof. 1st

Definition of Monetary Policy Many economists have given various

definitions of monetary policy. Some prominent definitions are as follows.

  According to Prof. Harry Johnson, "A policy employing the central banks

control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy."

Objectives of Monetary Policy The objectives of a monetary policy in India

are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives.

Rapid Economic Growth Price Stability Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Neutrality of Money

Let us now see objectives of monetary polic

Price Stability Exchange Rate Stability Balance of Payments (BOP)

Equilibrium Full Employment : Neutrality of Money Equal Income Distribution :

Advantages & Disadvantages of Monetary Policy Monetary policy refers to the actions

taken by central banks, such as the Federal Reserve in the United States, the Bank of England and the Bank of Australia, to affect the money supply and the overall performance of their respective nations' economies.

Evaluation of the Monetary Policy in India During the reforms though the Monetary

policy has achieved higher success in the Monetary policy, it is not free from limitation or demerits. It needs to be evaluated on a proper scale.

Failed in Tackling Budgetary Deficit : The higher level of the budget deficit has made the Monetary policy ineffective. The automatic monetization of the deficit has led to high Monetary expansion.

monetary policy

Monetary policy is associated with interest rates and availabilility of credit. Instruments of monetary policy have included short-term interest rates and bank reserves through the monetary base. For many centuries there were only two forms of monetary policy

Trends in central banking currency   open market operations  reserve requirements. banks' reserve accounts

Types of monetary policy

In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations). These open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the effects of these actions.

Price level targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more certainty about future price increases to consumers.

Gold standard

The gold standard is a system under which the price of the national currency is measured in units of gold bars and is kept constant by the government's promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard might be regarded as a special case of "fixed exchange rate" policy, or as a special type of commodity price level targeting.

TECHNIQUES OF MONETARY POLICY

I. Quantitative Methods: 1) Changes in Bank Rate Policy or R Open Market Operationediscount

Rate: Changes in Reserve Requirements Changes in Reserve Capital Changes in Marginal Requirements Credit Ceiling/Rationing of Credit

Qualitative Methods

Moral Su Consumers Credit

Control: asion:  Direct Action Publicity

4) Changes in Reserve Capital 5) Changes in Marginal

Requirements 6) Credit Ceiling/Rationing of

Credit

NEW MONETARY POLICY 2010-11 IN INDIA India’s Central Bank, the Reserve Bank

of Indiareleased its Economic Policy for 2010-11, explaining India’s high inflation rates, liquidity lapse, rise in interest rates and growth projections. The economic policy, released roughly a month prior to the Central Government’s annual budget is usually a precursor of things to come and an indication of changes New Delhi might tweak for the following financial year April 2011-March 2012.