Monetary policy-makers can help smooth out the fluctuations of the business cycle by?

What is instruments of monetary policy?

:Monetary Policy:Monetary policy is a part over all economic policy of a country. It is employed by the government as an effective tool to promote economic stability and achieve certain predetermined objectives.Meaning and definition:Monetary Policy deals with the total money supply and its management in an economy. It is essentially a programme of action undertaken by the monetary authorities generally the central bank to control and regulate the supply of money with the public and the flow of credit with a view to achieving economic stability and certain predetermined macro economic goals.Monetary policy can be explained in two different ways. In a narrow sense, it is concerned with administering and controlling a country's money supply including currency notes and coins, credit money, level of interest rates and managing the exchange rates. In a broader sense, monetary policy deals with all those monetary and non-monetary measures and decisions that affect the total money supply and its circulation in an economy. It also includes several non-monetary measures like wages and price control, income policy, budgetary operations taken by the government which indirectly influence the monetary situations in an economy.Different writers have defined monetary policy in different ways. Some of the important ones are as follows.1. According to RP Kent, "Monetary policy is the management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment".2. In the words of D.C.Rowan, "The monetary policy is defined as discretionary act undertaken by the authorities designed to influence the supply of money, cost of money or interest rate and the availability of money".Monetary policy basically deals with total supply of legal tender money, i.e., currency notes and coins, total amount of credit money, level of interest rates, exchange rate policy and general liquidity position of the country.Credit policy which is different from the monetary policy affects allocation of bank credit according to the objective of monetary policy.The government in consultation with the central bank formulates monetary policy and it is generally carried out and implemented by the central bank. It is evolved over a period of time on the basis of the experience of a nation. It is structured and operated with in the institutional framework and money market of the country. Its objectives, scope and nature of working etc is collectively conditioned by the economic environment and philosophy of time. Monetary policy along with fiscal policy and debt management lumped together form the financial policy of the country.Monetary policy is passive when the central bank decides to abstain deliberately from applying monetary measures. It is active when the central bank makes use of certain instruments to achieve the desired objectives. It may be positive or negative. It is positive when it promotes economic activities and it is negative when it restricts or curbs economic activities. Similarly, it is liberal when there is expansion in credit money and it is restrictive when it leads to contraction in money supply. Again, a cheap money policy may be followed by cutting down the interest rates or a dear money policy by raising the rate of interest.The Scope and effectiveness of monetary policy depends on the monetization of the economy and the development of the money market.Parameters of monetary policy:Broadly speaking there are three parameters of monetary policy of a country. It is through these parameters, the monetary policy has to operate. They are1. Total money supply available in a country.2. Cost of borrowings or the level of interest rates.3. The nature of credit control measures.All the three put together determine the nature of working of monetary policy.Objectives of Monetary PolicyObjectives of monetary policy must be regarded as a part of overall economic objectives of the government. It should be designed and directed to achieve different macro economic goals. The objectives may be manifold in relation to the general economic policy of a nation. The various objectives may be inter related, inter dependent and mutually complementary to each other. They may also be mutually inconsistent and clash with each other. Hence, very often the monetary authorities are concerned with a careful choice between alternative ends. The priorities of the objectives depend on the nature of economic problems, its magnitude and economic policy of a nation. The various objectives also change over a time period.Economists have conflicting and divergent views with regard to the objectives of monetary policy in a developed and developing economy. There are certain general objectives for which there is common consent and certain other objectives are laid down to suit to the special conditions of a developing economy. The main objective in a developed economy is to ensure economic stability and help in maintaining equilibrium in different sectors of the economy where as in a developing economy it has to give a big push to a slowly developing economy and accelerate the rate of economic growth.General objectives of monetary policy.1. Neutral money policy:Prof. Wicksteed, Hayak, Robertson and others have advocated this policy. This objective was in vogue during the days of gold standard. According to this policy, money is only a technical devise having no other role to play. It should be a passive factor having only one function, namely to facilitate exchange. It should not inject any disturbances. It should be neutral in its effects on prices, income, output, and employment. They considered that changes in total money supply are the root cause for all kinds of economic fluctuations and as such if money supply is stabilized and money becomes neutral, the price level will vary inversely with the productive power of the economy. If productivity increases, cost per unit of output declines and prices fall and vice-versa. According to this policy, money supply is not rigidly fixed. It will change whenever there are changes in productivity, population, improvements in technology etc to neutralize fundamental changes in the economy. Under these conditions, increase or decrease in money supply is allowed to result in either fall or raise in general price level. In a dynamic economy, this policy cannot be continued and it is highly impracticable in the present day economy.2. Price stability:With the suspension of the gold standard, maintenance of domestic price level has become an important aim of monetary policy all over the world. The bitter experience of 1920's and 1930's has made all most all economies to go for price stability. Both inflation and deflation are dangerous and detrimental to smooth economic growth. They distort and disturb the working of the economic system and create chaos. Both of them are bad as they bring unnecessary loss to some groups where as undue advantage to some others. They have potential power to create economic inequality, political upheavals and social unrest in any economy. In view of this, price stability is considered as one of the main objectives of monetary policy in recent years. It is to be remembered that price stability does not mean that prices of all commodities are kept constant or fixed over a period of time. It refers to the absence of sharp variations or fluctuations in the average price level in the country. A hundred percent price stability is neither possible nor desirable in any economy. It simply implies relative price stability. A policy of price stability checks cyclical fluctuations and smoothen production and distribution, keeps the value of money stable, prevent artificial scarcity or prosperity, makes economic calculations possible, introduces an element of certainty, eliminate socio-economic disturbances, ensure equitable distribution of income and wealth, secure social justice and promote economic welfare. On account of all these benefits, monetary authorities have to take concrete steps to check price oscillations. Price stability is considered as one of the prerequisite condition for economic development and it contributes positively to the attainment of a steady rate of growth in an economy. This is because price stability will build up public morale and instill confidence in the minds of people, boost up business activity, expand various kinds of economic activities and ensure distributive justice in the country. Prof Basu rightly observes, "A monetary policy which can maintain a reasonable degree of price stability and keep employment reasonably full, sets the stage of economic development".3. Exchange rate stability:Maintenance of stable or fixed exchange rate was one of the major objects of monetary policy for a long time under the gold standard. The stability of national output and internal price level was considered secondary and subservient to the former. It was through free and automatic imports and exports of gold that the country was able to remove the disequilibrium in the balance of payments and ensure stability of exchange rates with other countries. The government followed the policy of expanding currency and credit with the inflow of gold and contracting currency and credit with the outflow of gold. In view of suspension of gold standard and IMF mechanism, this object has lost its significance. However, in order to have smooth and unhindered international trade and free flow of foreign capital in to a country, it becomes imperative for a county to maintain exchange rate stability. Changes in domestic prices would affect exchange rates and as such there is great need for stabilizing both internal price level and exchange rates. Frequent changes in exchange rates would adversely affect imports, exports, inflow of foreign capital etc. Hence, it should be controlled properly.4. Control of trade cycles:Operation of trade cycles has become very common in modern economies. A very high degree of fluctuations in over all economic activities is detrimental to the smooth growth of any economy. Economic instability in the form of inflation, deflation or stagflation etc would serve as great obstacles to the normal functioning of an economy. Basically, changes in total supply of money are the root cause for business cycles and its dampening effects on the entire economy. Hence, it has become one of the major objectives of monetary authorities to control the operation of trade cycles and ensure economic stability by regulating total money supply effectively. During the period of inflation, a policy of contraction in money supply and during the period of deflation, a policy of expansion in money supply has to be adopted. This would create the necessary economic stability for rapid economic development.5. Full employment:In recent years it has become another major goal of monetary policy all over the world especially with the publication of general theory by Lord Keynes. Many well-known economists like Crowther, Halm. Gardner Ackley, William, Beveridge and Lord Keynes have strongly advocated this objective in the context of present day situations in most of the countries. Advanced countries normally work at near full employment conditions. Their major problem is to maintain this high level of employment situation through various economic polices. This object has become much more important and crucial in developing countries as there is unemployment and under employment of most of the resources. Deliberate efforts are to be made by the monetary authorities to ensure adequate supply of financial resources to exploit and utilize resources in the best possible manner so as to raise the level of aggregate effective demand in the economy. It should also help to maintain balance between aggregate savings and aggregate investments. This would ensure optimum utilization of all kinds of resources, higher national output, income and higher living standards to the common man.6. Equilibrium in the balance of payments:This objective has assumed greater importance in the context of expanding international trade and globalization. To day most of the countries of the world are experiencing adverse balance of payments on account of various reasons. It is a situation where in the import payments are in excess of export earnings. Most of the countries which have embarked on the road to economic development cannot do away with imports on a large scale. Imports of several items have become indispensable and without these imports their development process will be halted. Hence, monetary authorities have to take appropriate monetary measures like deflation, exchange depreciation, devaluation, exchange control, current account and capital account convertibility, regulate credit facilities and interest rate structures and exchange rates etc. In order to achieve a higher rate of economic growth, balance of payments equilibrium is very much required and as such monetary authorities have to take suitable action in this direction.7. Rapid economic growth:This is comparatively a recent objective of monetary policy. Achieving a higher rate of per capita output and income over a long period of time has become one of the supreme goals of monetary policy in recent years. A higher rate of economic growth would ensure full employment condition, higher output, income and better living standards to the people. Consequently, monetary authorities have to take the necessary steps to raise the productive capacity of the economy, increase the level of effective demand for various kinds of goods and services and ensure balance between demand for and supply of goods and services in the economy. Also they should take measures to increase the rate of savings, capital formation, step up the volume of investment, direct credit money into desired directions, regulate interest rate structure, minimize economic and business fluctuations by balancing demand for money and supply of money, ensure price and overall economic stability, better and full utilization of resources, remove imperfections in money and capital markets, maintain exchange rate stability, allow the inflow of foreign capital into the country, maintain the growth of money supply in consistent with the rate of growth of output minimize adversity in balance of payments condition, etc. Depending upon the conditions of the economy money supply has to be changed from time to time. A flexible policy of monetary expansion or contraction has to be adopted to meet a particular situation. Thus, a growth-friendly monetary policy has to be pursued by monetary authorities in order to stimulate economic growth.It is to be noted that the above-mentioned objectives are inter related, inter dependent and inter connected with each other. Each one of the objectives would affect the other and in its turn is influenced by the others. Many objectives would come in clash with others under certain circumstances. A proper balance between different objectives becomes imperative. Monetary authorities have to determine the priorities depending upon the economic environment in a country. Thus, there is great need for compromise between different objectivesObjectives of monetary policy in developing countries:As the development problems of developing countries are different from that of developed countries, the objectives of monetary policy also changes. The following objectives may be considered in the context of developing countries.1. Development role:It has to promote economic development by creating, mobilizing and providing adequate credit to different sectors of the economy. Supply of sufficient financial resources, its proper direction, canalization and utilization, control of inflation and deflation etc would create proper background for laying a solid foundation for rapid economic development.2. Effective central banking:In order to achieve various objectives of monetary policy and to meet the ever-growing development requirements of the economy, the central bank of the country has to operate effectively. It has to control the volume of credit money and its distribution through the use of various quantitative and qualitative credit instruments. Central bank of the country should act as an effective leader to control the activities of all other financial institutions in the country. It should command the respect of other institutions.3. Inducement to savings:It has to encourage the saving habits of the common man by providing all kinds of monetary incentives. It has to take the necessary steps to expand the banking facilities in the country and mobilize savings made by them. Special steps are to be taken to mobilize rural small savings.4. Investment of savings:It should help in converting savings into productive investments. For this purpose, it has to create an institutional base and investment climate in the country. People should have variety of opportunities to invest their hard earned money and earn adequate retunes on them.5. Developing banking habits:Monetary authorities have to take effective and imaginary steps to popularize the use of various credit instruments by the common man. Banking transactions should become the part of their day-to-day life.6. Magnetization of the economy:The monetary authorities have to take different measures to convert non-monetized sector or barter sector into monetized sector and make people use credit money extensively in their day-to-day life. Increase in total money supply should be in accordance with the degree of monetization of the economy.7. Monetary equilibrium:It is the responsibility of the monetary authorities to maintain a proper balance between demand for money and supply of money and ensure adequate liquidity position in the economy so that neither there will be excess supply of money nor shortage in the circulation of money.8. Maintaining equilibrium in the balance of payments:It is the job of the monetary authorities to employ suitable monetary measures to set right disequilibrium in the balance of payments of a country.9. Creation and expansion of financial institutions:Monetary authorities of the country have to take effective steps to improve the existing currency and credit system. They should help in developing banking industry, credit institutions, cooperative societies, development banks and other types of financial institutions, to mobilize more savings and direct them to productive activities.10. Integration of organized and unorganized money markets:The money markets are under developed, undeveloped, highly unorganized and they are not functioning on any well laid down principles. In fact, there is no proper integration between organized and unorganized money markets. This has come in the way of well-developed money markets in these countries. Hence, money markets are to be brought under the purview of the central bank of the country.11. Integrated interest rate structure:The monetary authorities have to minimize the existence of different interest rates in different segments of the money market and ensure an integrated interest rate structure.

Monetary policy-makers can help smooth out the fluctuations of the business cycle by?

Add your answer:

How can monetary policy makers help smooth out fluctuations of the business cycle?

What is the goal of stabilization policy is to smooth out fluctuations in the?

Why payroll system is important?

How does One Smooth Stone deliver Return on Investment to its clients?

What is instruments of monetary policy?

How can monetary policy makers help smooth out fluctuations of the business cycle?

What is the goal of stabilization policy is to smooth out fluctuations in the?

What is a smoothing capacitor?

What is the function of a capacitor in the half wave rectification?

What is the function of jobbers?

Why is labor important for a business?

How brand affect in organization?

What are the task of administration?

How do you think the role of a Business Support Assistant contributes to the smooth running of a Debenhams store?

What is capacitor smoothing?

Use of technology in entetpreneurship?

Role of general manager?

Resources

Top Categories

Product

Company