- MONETARY POLICY AND STABILIZATION
ROLE OF MONETARY POLICY - MACRO ECONOMICS
- DR SHASHI AGGARWAL
- MONETARY POLICY
- MONETARY POLICY REFERS TO THAT POLICY WHICH THE
GOVERNMENT OF THE CENTRAL BANK OF THE COUNTRY CONTROLS
·
IN ORDER TO ATTAIN A SET
OF OBJECTIVES ORIENTED TOWARDS THE GROWTH AND STABILITY OF THE ECONOMY.
- OBJECTIVES OF MONETARY POLICY
- FULL EMPLOYMENT: PRINCIPAL OBJECTIVES AND FULL EMPLOYMENT REFERS TO
SITUATION WHEREIN ALL COMPETENT PERSONS WHO ARE KILLING TO WORK AT THE
PREVAILING WAGE RATE AND GET WORK. TO ATTAIN THIS SITUATION NECESSARY TO
INCREASE PRODUCTION AND DEMAND. FOR THIS GOVT ADOPTS CHEAP POLICY
- ECONOMIC GROWTH:-ECONOMIC DEVELOPMENT REFERS TO THE PROCESS OF SUSTAINED RISE IN REAL
INCOME PER CAPITA. IN UNDERDEVELOPED ECONOMIES THE INCOME AND STANDARD OF
THE LIVING OF THE PEOPLE IS VERY LOW. ASSOCIATED WITH LOW PRODUCTION CAPACITY DUE TO LOW RATE OF CAPITAL
FORMATION AND GOVT ADOPTS SUCH A MONETARY POLICY TO ACCELERATE THE CAPITAL
FORMATION
- PRICE STABILITY: PRICE STABILITY REFERS TO WIDE
FLUCTUATIONS IN PRICES. INFLATION OCCURS DUE TO RISE IN DEMAND AND OR COST
RISE OR FALL IN PRODUCTION. MONETARY POLICY SEEKS TO ERADICATE BOTH
INFLATIONARY AND DEFLATIONARY TENDENCIES IN THE SYSTEM
- EXCHANGE STABILITY:-EXCHANGE RATE REFERS TO THE
NUMBER OF UNITS OF ANOTHER COUNTRY THAT CAN BE OBTAINED EXCHANGE FOR ONE
UNIT OF DOMESTIC CURRENCY. THERE SHOULD NOT BE MANY FLUCTUATION IN THE
FOREIGN EXCHANGE RATE
- MONETARY POLICY AND STABILIZATION
- ECONOMIC STABILIZATION IMPLIES MINIMUM POSSIBLE
FLUCTUATION IN THE PRICES AND RATES OF FOREIGN EXCHANGE IN THE ECONOMY.
- DOES NOT MEAN TOTAL LACK OF ANY CHANGE BUT CHANGES
RESTRICTED TO CERTAIN EXTENT
- CLASSICAL ECONOMIST: IN CAPITALIST ECONOMY ALL ECONOMIC FACTORS FIND
AN AUTOMATIC ADJUSTMENT AND GOVERNMENT DOES NOT INTERFERE. AND HELD MONEY
IS NEUTRAL AND IT MEANS CHANGES IN THE SUPPLY OF MONEY HAVE NO EFFECT ON
THE PRICES OF GOODS AND OTHER REAL FACTORS. MONEY IS MERE MEDIUM OF
EXCHANGE
- SUPPLY OF MONEY IS DETERMINED BY THE OPERATION OF
GOLD STANDARD. IF THE BALANCE OF PAYMENT IS FAVOURABLE THEN INFLOW OF GOLD
IN THE COUNTRY. INCREASE IN THE SUPPLY OF MONEY AND MARKET RATE OF
INTEREST FALLS BELOW NATURAL RATE OF INTEREST. DEMAND FOR MONEY FOR
INVESTMENT EXCEEDS SAVING. FOR BRINGING INFLATION DOWN,GOVT POLICY SHOULD
FOCUS ON EQUALITY OF MARKET RATE OF INTEREST AND NATURAL RATE OF INT
- GREAT DEPRESSION OF 1930,THE SIGNIFICANCE OF
MONETARY POLICY HAS BEEN ON THE WANE
- LORD KEYNES HAS SUGGESTED ADOPTION OF FISCAL
POLICY IN PLACE OF MONETARY POLICY
- ACCORDING TO HIM : BY LOWERING THE RATE OF
INTEREST,INVESTMENT IS NOT STIMULATED AS MEC IS VERY LOW
- RATE OF INTEREST CAN NOT FALL MORE THAN A
PARTICULAR LIMIT BECAUSE OF LIQUIDITY TRAP
- MODERN MONETARY ECONOMISTS LIKE MILTON FRIEDMAN
HAS UNDERLINED THE SIGNIFICANCE OF MONETARY POLICY TO ATTAIN ECONOMIC
STABILIZATION
- CHANGES IN SUPPLY OF MONEY HAVE A CONSIDERABLE
EFFECT IN PRICES,INCOME AND OUTPUT
- PRICE STABILITY AND MONETARY POLICY
- PRICE STABILITY IMPLIES THAT THERE SHOULD NOT BE
FREQUENT FLUCTUATIONS IN PRICES.
- LORD KEYNES AND GUSTAV CASSEL WERE THE MAIN
SUPPORTER OF THE VIEW THAT THE OBJECTIVE OF MONETARY POLICY SHOULD BE TO
MAINTAIN PRICE STABILITY BECAUSE IT IS THE PRICE INSTABILITY THAT
UNLEASHES THE CONDITIONS OF BOOM AND DEPRESSION
- RISING AND FALLING IN PRICES GIVE BIRTH TO SOCIAL
INJUSTICE IN THE COUNTRY
- IT BRING INSTABILITY IN THE ECONOMY.
- INFLATION AND MONETARY POLICY
- TENDENCY FOR THE PRICES TO RISE CONTINUOUSLY
- THE MAIN REASON : RISING PRICES IS MORE DEMAND
THAN SUPPLY
- AIM OF THE POLICY DESIGNED TO CONTROL INFLATION IS
BRING DOWN THE DEMAND
- MONETARY POLICY IS ENFORCED IN SUCH A WAY THAT SUPPLY OF MONEY IS CONTROLLED
AND IN RESULT CONTRACTION OF CREDIT
- METHODS TO CONTROL THE INFLATION
- CONTROL OVER SUPPLY OF MONEY:-SUPPLY OF THE MONEY. RESTRICTIONS ARE PLACED ON
THE ISSUE OF CURRENCY NOTES BY SUITABLY AMENDING CENTRAL BANK’S RULES AND
REGULATIONS BY THE GOVERNMENT.
- CHANGE IN COST OF MONEY OR RATE OF INTEREST: ADOPT DEAR MONEY POLICY TO CONTROL INFLATION. BANK RATE
IS RAISED BY THE GOVERNMENT AND IN RETURN IT WILL RAISE THE RATE OF
INTEREST.
- CONTROL OVER THE AVAILABILITY OF MONEY OR CREDIT
CONTROL:-QUANTITATIVE AND QUALITATIVE METHODS OF CREDIT
CONTROL SECURITIES ARE SOLD IN THE OPEN MARKET SO THAT AVAILABILITY OF
MONEY WITH THE BANKS AND THE PEOPLE IS REDUCED. MINIMUM CASH RESERVES OF
THE BANKS ARE INCREASED. CREDIT IS RATIONED. MARGINAL REQUIREMENT OF THE
LOAN IS RAISED. DIRECT ACTION IS TAKEN. LIQUIDITY RATIO IS ALSO RAISED
- DEMONETIZATION OF OLD CURRENCY: WHEN INFLATION ASSUMES DANGEROUS DIMENSIONS, THE
GOVERNMENT CAN DEMONETIZE OLD CURRENCY AND ISSUE NEW IN PLACE. PEOPLE ARE
ALLOWED TO GET THEIR OLD CURRENCY WITH NEW ONE WITH IN STIPULATED TIME
- DEFLATION AND MONETARY POLICY
- TENDENCY FOR THE PRICES TO FALL
- SITUATION OF DEPRESSION
- DEMAND IS LESS THAN SUPPLY
- THE OBJECTIVE OF MONETARY POLICY IS TO INCREASE
THE DEMAND
- AND INCREASE THE SUPPLY OF MONEY AND LOWER THE
RATE OF INTEREST AND EXPAND THE CREDIT
- MONETARY METHODS TO CONTROL THE DEFLATION
- INCREASE IN SUPPLY OF MONEY:-MORE NOTES ARE ISSUED BY CENTRAL BANK AND IT WILL
RAISE THE SUPPLY OF MONEY. BY DEFICIT FINANCING GOVERNMENT CAN INCREASE
ITS EXPENDITURE. AD IS LIKELY TO INCREASE
- REDUCTION IN THE COST OF MONEY OR RATE OF INTEREST:-PURSUE CHEAP MONEY POLICY. LEADS TO FALL IN BANK
RATE AND HENCE THE RATE OF INTEREST. LOWER INTEREST RATE WILL ENCOURAGE
MORE BORROWING BOTH FOR PRODUCTIVE AND UNPRODUCTIVE AND INCREASE IN CONSUMPTION AND
INVESTMENT AND HENCE IN AGGREGATE DEMAND
- INCREASE IN THE AVAILABILITY OF MONEY:-SHOULD BUY THE SECURITIES IN THE OPEN MARKET AND
LOWER THE LIQUIDITY RATIO AND MINIMUM CASH RESERVES OF THE BANKS SHOULD
ALSO BE BROUGHT DOWN. MARGIN REQUIREMENT IS LOWER DOWN
- EXCHANGE STABILITY AND MONETARY POLICY
- NOT TO MUCH RISE OR FALL IN THE RATE OF EXCHANGE
- IN THE MODERN ERA GOLD STANDARD IS NOT FOUND IN
ANY COUNTRY OF THE WORLD
- INTERNATIONAL MONETARY FUND MAINTAIN THE STABILITY
BY ADOPTING A FIXED RATE OF EXCHANGE TILL 1976
- AFTER FLEXIBLE RATE OF EXCHANGE
- UNDER THIS POLICY THE BASIS OF EXCHANGE SIMILAR TO
GOLD STANDARD
- EXCHANGE STABILITY
- CONTROL OVER SUPPLY OF MONEY: IF IMPORT ARE MORE THAN EXPORT, SUPPLY OF MONEY
SHOULD BE REDUCED. BRING DOWN THE PRICES AND ENCOURAGE EXPORTS AND
DISCOURAGE IMPORTS. BUT IF EXPORTS ARE MORE THAN IMPORTS THEN SUPPLY O
MONEY IS RAISED AND IT WILL DISCOURAGE EXPORT AND ENCOURAGE IMPORT
- CHANGE IN THE COST OF MONEY OR RATE IN THE
INTEREST:
- INSTABILITY IN THE RATE OF EXCHANGE IS DUE TO MORE
IMPORTS AND LESS EXPORT
- CONTROLLED BY LOWERING THE RATE OF INTEREST
- CONTRARY RATE OF INTEREST ON FOREIGN LOAN SHOULD
BE RAISED TO ATTRACT FOREIGN CAPITAL AND VICE VERSA
- CONTROL OVER THE AVAILABILITY OF MONEY :-
- IN THE EVENT OF FALL IN EXCHANGE RATE,CREDIT
FACILITIES SHOULD BE EXTENDED TO EXPORT TRADE WITH A VIEW TO ENCOURAGE
EXPORT
- MORE CREDIT SHOULD BE AVAIL ABE AT LOW RATE OF
INTEREST
- OBJECTIVE OF ECONOMIC STABILITY ARE MUTUALLY
CONFLICTING
- MONETARY POLICY AND ECONOMIC DEVELOPMENT
- CAPITAL FORMATION AN IMPROVEMENT IN TECHNOLOGY ARE
THE PRE REQUISITES OF ECONOMIC DEVELOPMENT
- CAPITAL FORMATION IS DEPENDENT ON SAVING AND
INVESTMENT
- METHODS:
- MOBILIZATION OF SAVING
- ESTABLISHMENT OF FINANCIAL INSTITUTION
- ATTRACTIVE SCHEMES FOR SAVING
- DEPOSIT INSURANCE
- MONETARY POLICY AND ECONOMIC DEVELOPMENT
- CAPITAL FORMATION
- DIRECT INVESTMENT :-
- CAN MAKE UP THE DEFICIENCY OF PRIVATE INVESTMENT
BY INCREASING PUBLIC INVESTMENT
- DIRECT INVESTMENT CAN BE MADE BY MONETARY
AUTHORITY
- UNDER THE IMPACT OF INVESTMENT MULTIPLIER,NATIONAL
INCOME WILL INCREASE MANY MORE THAN INCREASE IN INVESTMENT
- INDIRECT INVESTMENT :BY ESTABLISHING SPECIAL FINANCE INSTITUTIONS LIKE
INDUSTRIAL BANKS,AGRICULTURE BANKS,EXPORT AND IMPORT BANKS
- MONETARY POLICY AND ECONOMIC DEVELOPMENT
- DEFICIT FINANCING: - RESULT A SOURCE OF FORCED SAVING. SUCH A PROVISION
IS MADE BY BORROWING FROM THE CENTRAL BANK
- PRICE STABILITY
- FULL EMPLOYMENT
- EQUILIBRIUM IN THE BALANCE OF PAYMENTS
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