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What is a Policy?
Governments usually formulates a lot of
Policy and
Fiscal Policy
History of Monetary
Policy
In old times, monetary policy was mainly
Monetary Policy
Can be-
Expansionary(Loose)
or
Contractionary(Tight
)
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We
reduce
money
supply
Now
people
have
less
mone
y at
hand
So,
people
buy
less
amoun
t of
goods
Deman
d for
goods
falls
Producer
s reduce
price to
maintain
sales
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GDP growth
We
increas
e
money
supply
Now
people
have
more
mone
y at
hand
So,
people
buy
more
amoun
t of
goods
Deman
d for
goods
rise
Producer
s produce
more
goods to
match
market
demand
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want to increase it
We
increas
e
money
supply
As a
result
banks
have
more
idle
money
So,
banks
reduce
interes
t rate
Cost of
investme
nt falls
and goods
become
cheaper
Export
rises
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Characteristics of OMO
Sometimes done for temporary periods
Repurchase Agreement -- banks buys bond with
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Discount Rate
Defined as the rate of interest
Characteristics of DR
Done at the discretion of the
commercial banks
Affects interest rate structure of the
commercial and specialized banks
DR may influence economic activity
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Characteristics of RR
Too blunt -- needs tiny changes for
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Strategies of Monetary
Policy
Money Growth Targeting
Inflation Targeting
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unemployment
Central banks initially pursued money growth targeting to
achieve steady growth and low inflation
In this strategy central banks announces the rate of growth of
money for the next one year
But in 1980s, in spite of low inflation, output and
unemployment were unstable in USA, UK, Canada and Germany
Because, due to changing financial system, money demand was
hard to predict and, therefore, money growth targeting was
ineffective
A tightly regulated financial system is necessary for money
growth targeting to be successful. Tight financial regulation is
often not possible
Specially, in the developing countries, where financial reforms
are still taking place, strict financial regulations are not viable
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Inflation Targeting
Central banks in many countries adopted inflation targeting
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country
If these goals are not achieved, then operation of
the monetary policy tools are not effective
People do not have faith in monetary policy
anymore
Monetary policy lose credibility
Countrys development objectives fall into chaos
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Dads
Strategy
Fight
Point
assignment
Go to
Park
Dont go
to Park
Dad: 2
Kids: 3
Outcome A
Dont
Fight
Dad: 3
Kids: 2
Outcome B
Dad: 0
Kids: 1
Outcome C
Dad: 1
Kids: 0
Outcome D
Fight
Dont Fight
Go to
park
Dont go to
park
Kids
Dad
0
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Monetary Policy in
Bangladesh
Until 1990:
limited role of BB
Government directly controlled exchange rate and interest rate
Taka was pegged against foreign currencies
May, 2003
Bangladesh Bank is regularly issuing Monetary
Policy Statement since January 2006
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Limitations of Monetary
Policy
Does not work when aggregate demand
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Monetary
vs. do
Fiscal
Policy
If the goals of Policy
the two policies
not match,
development objective will be damaged.
Example:
Suppose, Bangladesh is suffering from high
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