monetary policy final (1)

7/30/2019 Monetary Policy Final (1)

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BBA 4th (AZ)


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Wosait Ullah Rafique 097Naqash Aslam 094

Umar Bashir 076Faiz Ullah 069


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The process by which monetary authority(central bank, currency board) of a countrycontrols the supply of money,

Targeting the rate of interest,

For promoting economic growth andstability.

Official goal: stable prices and lowunemployment


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Centuries ago

Two forms of monetary policy

Decision about coinageDecision to print paper money to createcredit

Executive decisionWas generally in the hand of authority withthe power of coin


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After larger trading network

Ability to set price between gold and silver

Price of local currency to foreign currenciesIn 7th century

JIAOZI

Paper money was originated China

Did not replace metallic currency

Were used alongside copper coins


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1694Bank of England was created

Printing notes and back them with gold

Idea of monetary policy began to establish

The original goal was;

To maintain the value of coinagePrint notes to trade around the world


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1870-1920Central banking system was set up byindustrialized nations

Idea ofeffect of interest rate on economy

October, 1979

Paul Volcker tried this policy 1st time


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Today, monetary decisions take into widerrange to factors;

Short term interest rate

Long term interest rateExchange rates

Credit quality

International capital flow of money on largescales

Govt. vs. private sector spending/saving


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Faiz Ullah

1002212-069


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Stability in price level

Economic development

Arrangement of full employment

Expansion of credit facility

Equality & Justice

Stability in exchange rate


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Naqash Aslam

1002212-094


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Meaning:-

These methods help to control the

quantity of money in the country.


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Bank rate policy

Open market policy

Changes in reserve requirements

Credit rationing


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The rate at which the central bank of thecountry gives loans to commercial banks is

known as Bank Rate or re-discount rate, InPakistan; State Bank charges 10% as bankrate.


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Use of Bank rates

In the inflationarysituation

In the depressionarysituation

To control inflation

Central bank increaserate of interest thecommercial bank alsoincrease rate of interest.

Loan will be decreasesinvestment, output andprices will be fall.

Inflation will be

controlled.

To remove deflation

Central bank decreasethe bank rate andcommercial bank alsodecrease the bank rate.

People will get moreloan investment,production, and priceswill be rising up.

Deflation will be control.


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Its include the sales and purchase by thecentral bank, of

Assets

Foreign exchange

Gold

Government securitiesCompany securities


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Use of Open Market operation

In the inflationary

situationIn the depressionary

situation

Central bank decreasethe money supply.

Central bank sale out thesecurities to commercialbank and control moneysupply.

Central bank increase

the money supply.Central bank purchasethe securities from thecommercial bank.


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Commercial bank has to keep a certainpercentage of his deposits in the form ofreserves just to meet the demand of thedepositors.

As in the case of Pakistan, each commercialbank has to keep 30% of its deposits tomeet the needs of its depositors.


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Inflationary conditionIf the central bank realizes that the

commercial banks are advancing excessive loans, it will

increase the reserve requirements. Accordingly,commercial banks could advance less loans.

Deflationary condition

On the other hand, in deflation,if the central bank reduces the reserve requirements,the commercial banks will be able to advance' moreloans.


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Umar Bashir

1002212-076


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There are several types qualitative tools formonitory policy which are as follows:

Credit RationingUnder this, certain conditions are laid by theCentral Bank to see proper regulation of

consumer credit. This is to prevent excessexpansion of credit.


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Direct Action

This includes charging penalty interest

rates, qualitative credit ceiling etc. on CommercialBank. It has its direction and restrictive measures,which all the concern banks should followregarding the lending and investment.


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Margin Requirement

Margin refers to difference between market

value and amount borrowed against the securities.Bank, while advancing loan against security, do notlend the full amount, but less. This is done keepingin view the difference between the value of

security and the amount of advance to cover anyloss.


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Moral Persuasion

This is used by many countries. It has a greatinfluence over the loan policy of banks. There is a co-operation between them. Under this, the Central Bankmakes an informal request to Commercial Bank tocontract loans in the time of inflation and expand loansin depression. It helps the Central Bank to secure the

willingness and co-operation, but then that dependson the amount of respect and authority the CentralBank enjoys among the member banks.


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monetary policy final (1)

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