Monetary Policy

MONETARY POLICY

What is it? (ECONOMIC POLICY=ECONOMIC GROWTH) Monetary policy is one which influences the public’s stock of monetary substitutes, or the public’s demand for such assets, or both- that is, policy which influences the public’s liquidity position.

Objectives of Monetary Policy (MP) 1). The Interest Rate Structure Low rate of interest – promotes investment High rate of interest – discourages investment

2).The Money Supply Developed countries – MP ensures Stability Which means a balance between demand and supply of money (both keep pace)

3).The Supply of Credit • Adequate provision of credit for productive activities necessary for maintaining and promoting the productive activities in the economy • Curb undue expansion of Credit Necessary to control the inflationary conditions in the economy

4).Creation and Expansion of Financial Institutions FI encourage savings and then channel them to the agencies undertaking investment.

Limitations of MP 1.

Money and Capital Markets and Financial Institutions are highly unorganized, they are externally dependent and fragmented.

2.

Objectives are not clear of MP

3.

Techniques of control adopted by monetary authorities are less effective( bank rate fails to restrict credit expansion since the interest rate structure in the economynis not sensitive to the bank rate)