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CHAPTER 4 OVERVIEW
This chapter will: A. Overview of objectives and functions of BNM B. Describe how BNM influences monetary policy C. Explain how monetary policy is used in other countries
Issues currency and manages the nation's international reserves Banker and financial adviser to the Government Promote monetary stability and a sound financial structure
b) c)
d)
important to both the short-term objective of economic recovery as well as the long-term aim to maintain a sustainable external position.
has been for market forces to determine the rate and reflect underlying economic fundamentals. Interventions are conducted only to smooth excessively volatile fluctuations. This is called managed floating.
Pegging - fixing of the exchange rate at RM3.80 per
US$1 effective September 1, 1998. Ringgit was unpegged on 23rd July 2005.
Managed float against a basket of currencies 23rd
means" advances, to the Government to cover any deficit in the budget revenue.
maintains a close relationship with the Ministry of
Finance.
stability is a key prerequisite for sustained economic growth, in the absence of which the mobilisation of resources and the efficient channelling of resources to productive investment would be adversely affected.
monetary conditions so that the balance sheets of corporations and financial institutions are not adversely affected by conditions of macroeconomic stress.
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ensure a sound banking system that provides a mechanism for the intermediation process to enable the economy to function efficiently.
An essential element for promoting financial stability
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and volume of credit are sufficiently elastic to the demands of the domestic economy, without creating undue pressure on resources and prices.
It regulates the volume of money and credit
generation by the banking system through a range of instruments, including guidelines on lending to priority sectors and selective credit and administrative measures.
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provides for the Bank Negara Malaysia (BNM) to be the sole currency issuing authority in the country.
The BNM commenced issuing its own currency on June
12, 1967, thereby replacing the Currency Board as the sole currency issuing authority in Malaysia.
The unit of currency was the Malaysian dollar, which was
divided into 100 cents. Under the Malaysian Currency (Ringgit) Act 1978, the Malaysian dollar and cent were renamed "Ringgit" and "sen" respectively.
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foreign exchange, reserve position with the International Monetary Fund and holdings of Special Drawing Rights.
To safeguard the external value of the Ringgit, the
CBO provides for the maintenance of a minimum external reserves backing of 80.59% against the currency issue.
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also evident from the centralisation of Government deposits with the Bank.
With this arrangement, government receipts, arising
mainly from the new issue of Government securities, tax and dividend payments are placed with BNM and managed by the Bank depending on the liquidity situation of the system.
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monetary stability and a sound financial structure, and for influencing the credit situation to help achieve the nations overall economic objectives.
To ensure the supply of money and the volume of
finance companies, merchant banks, discount houses and the Islamic Bank has its legal foundation in three main pieces of legislation, namely: (a) the Central Bank Ordinance 1958; (b) the Banking and Financial Institutions Act (BAFIA) 1989; and (c) the Islamic Banking Act 1983.
The BNM cooperates closely with the financial institutions to
promote and maintain a range of banking and other services for the public, enhance efficiency and strengthen the institutions' prudential standards, discipline and moral fibre.
In acting as banker to these institutions, the BNM maintains
special accounts for the major financial institutions, inspects them regularly and performs the functions of a lender of last resort.
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Central banks purchase of Securities: increase in money supply Central banks sale of Securities: decrease in money supply
2. Adjusting the Overnight Policy Rate (OPR) influences the market interest rates
Reserve Requirement Adjustments affect Money Growth because higher reserves lead to less borrowing and lower 19 reserves lead to more borrowing (see Exhibit 4.3)
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CHAPTER 5
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CHAPTER 5 OVERVIEW
This chapter will: A. Describe the impact of monetary policy B. Explain the tradeoffs involved in monetary policy C. Describe how financial market participants monitor and forecast the central banks policies D. Explain how monetary and fiscal policies are related
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monetary stability and a sound financial system, and to help influence the credit situation to achieve the nations overall economic objectives.
Long term BNM to ensure there is sufficient money
supply and credit to meet the governments objective of sustained growth with price stability. money supply is sufficiently elastic to counter any inflationary situation that may arise
level of unemployment
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1.)
2.)
3.)
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Exhibit 5.3 How Monetary Policy Can Affect Economic Conditions (continued)
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Exhibit 5.4 Effects of an Increased Money Supply According to the Rational Expectations Theory
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Loose monetary policy (more loanable funds) does not translate to more credit by banks (banks do not lend out newly created funds)
The effect of an increase in money supply may be disrupted due to an increase in inflationary expectations.
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Exhibit 5.10 Framework for Explaining How Monetary Policy and Fiscal Policy Affect Interest Rates over Time
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Tutorial
1. 2. 3. 4.
5.
Discuss the objectives of BNM as a central bank. Discuss the functions of BNM. Describe loose monetary policy what is the mechanism, how it works, and what is the expected outcome? Describe tight monetary policy what is the mechanism, how it works, and what is the expected outcome? Describe the following: 1. Open Market Operation (OMO) 2. Adjusting the Overnight Policy Rate (OPR) 3. Adjusting the Statutory Reserve Requirement (SRR) ratio Questions and Applications (P109) 1. Q6, Q9, Q11, Q12
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6.