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Monetary policy is a process by which the central bank of a country controls the supply of money
in a country, often targeting the rate of interest for promoting economic growth and stability or in
other words sustainable growth. (Eric M. Leeper, 1996). The basic goal of monetary policy is to
gain the stable price or stable inflation 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 lowering 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.
Monetary policy focus on the interest rate on which banks and other financial institutions do
borrowing and lending in the economy and it also focus on the supply of money in the economy
by which inflation and unemployment is controlled. Monetary policy use certain on its tools to
get the above mentioned targets, its targets also includes foreign exchange rates in the country
that affects the balance of payment accounts of the country. (Robert H.Frank,2004). 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 (to achieve policy goals). The
beginning of monetary policy as such comes from the late 19th century, where it was used to
maintain the gold standard.
“During the recent years the responsibility of economic development has largely been shifted on
corporate sector from the governmental agencies. The responsibilities of every types of
development are being shifted from bureaucrats to the technocrats. The political roles and
pressures of the armed forces, business leaders, international consultants, technocrats, and
community leaders are being re-shaped. In the present transitory condition, the role and
responsibilities of civil servants are also being changed. The financial markets experiences in the
Far Eastern and South American countries in recent past have shown that the problems of
corporate sector are not only the problems of investors, speculators and stockbrokers, they are
also the problems of a common man. The financial problems in corporate sector cannot be
segregated from the problems of unemployment, income distribution, poverty and development.
In the present scenario, it seems that the poor are being virtually penalized for the end of cold
war. ‘Globalization’ is one of the prescriptions recommended by the builders of macroeconomic
models to solve the problem of poverty. It is a common phenomenon in all over the globe that all
privileges and rights and positives of the globalization are only for richer segment of the
societies. The poor do not have power to utilize the facilities of education, entertainments,
information technology, migration, immigration, and mobility. Immigration and education are
considered as modes of the reduction in poverty; they are
creating further gaps.”
Measuring the Stance of Monetary Policy for Pakistan’s Economy
“Economic literature and theory has a characteristic feature that it puts no barriers to its ever
changing dimensions if required by the time. Conduct of monetary policy is nevertheless a
different issue, which has mostly been under different transitions keeping intact the essence of
original economic theory with it. Pursuit of the price stability has always remained a desirable
and most primary goal and objective of monetary policy but the intensity that has been brought in
with the regimes of inflation targeting reveals a subtle commitment to the cause of economic
stability. This targeting is led by the idea of output being hampered if the inflation surpasses its
threshold level (Khan and Sinhadji, 2001), (Mubarik, 2005).”