Economics-For Managers


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Macroeconomics : Monetary Policy : Chapter 16

Monetary Policy can be broadly defined as "the deliberate effort by the Central Bank to influence economic activity by variations in the money supply, in availability of credit or in the interest rates consistent with specific national objectives." The objectives that are achieved through monetary policy are: price stability, exchange stability, full employment and maximum output and high rate of growth. Monetary authorities use open market operations, bank rate policy, reserve requirement changes and selective credit control as instruments to achieve the objectives mentioned above.

But, there are problems in implementing monetary policy. They are: lags in monetary policy, presence of financial intermediaries, contradiction in objectives and underdeveloped nature of money and capital markets. Monetary targeting refers to the practice of formulating monetary policy in terms of target growth of money stock. The basic objectives of the monetary policy of a developing country is to attain a maximum level of sustained economic growth, along with domestic price stability and realistic foreign exchange rates.

In India, the monetary policy always aims at price stability and growth. Apart from these two important goals, the Reserve Bank of India has made conscious attempts in recent years to maintain efficiency in the foreign exchange market, and curb destabilizing speculative activities. Central Banks in open economies manage reserve flows, exchange rate and monitor international financial developments.

Fiscal policy and monetary policy are interrelated because fiscal policies of the government determine the directions of the monetary policy (whether the RBI follows a tight money and credit policy or not), and the fiscal policies have to be devised depending on the monetary control required. Similarly, they deal with regulatory mechanisms and with maneuvering the economy in periods of inflation and recession.

Chapter 16 : Overview

Objectives Of Monetary Policy
Price Stability
Exchange Stability
Full Employment and Maximum Output
High Rate of Growth

Relevance Of Monetary Policy
Instruments Of Monetary Policy
Open Market Operations
Bank Rate Policy
Reserve Requirement Changes
Selective Credit Control

Problems In Monetary Policy
Lags in Monetary Policy
Pressure of Financial Intermediaries
Contradictions in Objectives
Underdeveloped Nature of Money and Capital Markets

Monetary Targeting
Relevance of Monetary Targeting

Monetary Policy In A Developing Economy
Monetary Policy in India

Monetary Policy In An Open Economy
Reserve Flows
The Role of the Exchange Rate System
The Foreign Desk

Link Between Fiscal Policy And Monetary Policy