Economics For Managers
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Chapter 16 : Monetary Policy
Objectives Of Monetary Policy
Price Stability
Exchange Stability
Full Employment and Maximum Output
High Rate of Growth
Relevance Of Monetary Policy
Instruments Of Monetary Policy
Open Market Operations
Bank Rate Policy
Reserve Requirement Changes
Selective Credit Control
Problems In Monetary Policy
Lags in Monetary Policy
Pressure of Financial Intermediaries
Contradictions in Objectives
Underdeveloped Nature of Money and Capital Markets
Monetary Targeting
Relevance of Monetary Targeting
Monetary Policy In A Developing Economy
Monetary Policy in India
Monetary Policy In An Open Economy
Reserve Flows
The Role of the Exchange Rate System
The Foreign Desk
Link Between Fiscal Policy And Monetary Policy
Chapter Summary
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Monetary Policy can be broadly defined as "the deliberate
effort by the Central Bank to influence economic activity by variations in the
money supply, in availability of credit or in the interest rates consistent with
specific national objectives." The objectives that are achieved through monetary
policy are: price stability, exchange stability, full employment and maximum
output and high rate of growth. Monetary authorities use open market operations,
bank rate policy, reserve requirement changes and selective credit control as
instruments to achieve the objectives mentioned above.
But, there are problems in implementing monetary policy. They are: lags in
monetary policy, presence of financial intermediaries, contradiction in
objectives and underdeveloped nature of money and capital markets. Monetary
targeting refers to the practice of formulating monetary policy in terms of
target growth of money stock. |
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The basic objectives of the monetary policy of a
developing country is to attain a maximum level of sustained
economic growth, along with domestic price stability and realistic
foreign exchange rates. In India, the monetary policy always aims at
price stability and growth. Apart from these two important goals,
the Reserve Bank of India has made conscious attempts in recent
years to maintain efficiency in the foreign exchange market, and
curb destabilizing speculative activities.
Central Banks in open economies manage reserve flows, exchange rate
and monitor international financial developments. Fiscal policy and
monetary policy are interrelated because fiscal policies of the
government determine the directions of the monetary policy (whether
the RBI follows a tight money and credit policy or not), and the
fiscal policies have to be devised depending on the monetary control
required. Similarly, they deal with regulatory mechanisms and with
maneuvering the economy in periods of inflation and recession.
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Short Case Studies / Caselets