Monetary Policy

INTRODUCTION

1.1 Concept of Monetary Policy

1.1.1 Tools of Monetary Policy and Methods of Credit Control:

a- Quantitative Method b- Qualitative Method

1.1.2 Types of Monetary Policy

a- Expansionary Monetary Policy b- Tightened Monetary Policy

1.1.3 Objective of the Monetary Policy:

Price Control
Full Employment
Stability of Foreign Exchange
Economic Growth

1.2 Monetary Policy Issues in Pakistan

 Concept of Monetary Policy
• “Monetary policy is an attempt of the Central Bank to influence
the economy by operating on such monetary variables as the
quantity of money and the rate of interest”. R.G, Lipsey
• Types of Monetary Policy
a- Expansionary Monetary Policy
b- Tightened Monetary Policy

Tools of Monetary Policy and Methods of Credit Control

b- Qualititative Method:
a- Quantitative Method: •Varying in Margin Requirement
•Open Market Operations on Security of Loans
•Variation in Bank Rate: •Consumers Credit Rationing
•Credit Rationing •Moral Persuasions
•Varying in Reserve •Direct Action
Requirements
 a- Quantitative Method
• Open Market Operations: It is the most important
tools, adopted by the central bank of any country to
control the money supply in economy. The central
bank sales and purchases the government securities
(treasury bills and prize bonds etc). During inflation,
the supply of money is decreased by recovering the
currency in circulation by the sales of government
securities to commercial banks and in deflation the
practice is reversed.
Variation in Bank Rate: Bank rate (also called
discount rate) is the rate at which the central bank
of a country rediscounts or buys the eligible bills
of exchange. This short term tool of monetary
policy is used to affect not only the bank reserve
but also the credit conditions in the economy as a
whole. An increase in the bank rate is usually
associated with the rise in market interest rate and
a general lightening of credit. A decrease in the
bank rate tends to be associated with a reduction
in market interest rate and overall easing of credit.
• Credit Rationing: This methods of credit control is
applied by the central bank in the times if financial
crises. The central bank rations the credit of each
member bank. It fixes the maximum amount which
each member bank can draw by rediscounting bill
of exchange.
• Varying in Reserve Requirements: The central bank
can affect the supply of money and availability of
bank credit in the country by changing the legal
reserve requirement of the commercial banks. For
example, during inflation, the central bank can
increase the reserve requirements of the banks.
The lending capacity of the banks is reduced which
ultimately decreases the supply of money
 b- Qualitative Method:
Varying in Margin Requirement on Security of Loans:
It is the minimum percentage down payments
which the purchaser of stock must make on the
market value of the securities. Marginal
requirement is, therefore the difference between
the market value of the security and its maximum
loan value. This technique is employed to limit the
borrowing for the purchase of the listed common
stock so the economic difficulties do not arise in
speculative stock purchases.
• Consumers Credit Rationing: This tool of monetary
management is applied when there arises a scarcity of
certain listed articles in the country. The central bank will
invoke specific restrains on consumer credit by raising the
required down payment and shortening the maximum
period of payment.
• Moral Persuasions: The central bank of any country
employs a minor instrument of moral caution to influence
the total borrowing at the central bank. It includes policy
statements, public announcements or outright appeal to
community spirit or a heart to heart talk with the bankers.
This method is affective for short period only.
• Direct Action: Monetary Policy is operated under certain
rules like Prudential Regulations – the rules, regulations
and code of conduct of various sectors regulated by the
central bank. The central bank has legal antiauthority to
take action against the commercial banks for violation of
the prescribed rules and regulations. It is carried on for
transparency and effectiveness of the said policy.
 1.1.3 Objective of the Monetary Policy:
i. Price Control
In Pakistan, price level is measured by Consumers Price Index. In Pakistan, price
level(inflation and deflation) means Consumer Price Index(CPI), that is, the change
in prices of 374 goods and services (consumers basket) on the basis of base year
2005-06 in 35 major cities of Pakistan measured by Lespear’s Index
ii. Full Employment
Mean by "full" employment is a rate somewhat less than 100%
employment. It has following major types:
• Structural unemployment focuses on the structural problems within
an economy and inefficiencies in labormarkets.
• Frictional unemployment is the time period between jobs when a
worker is searching for or transitioning from one job to another.
• Cyclical unemployment is a type of unemployment that occurs when
there is not enough aggregate demand in the economy to provide
jobs for everyone who wants to work.
• Disguised unemployment Employment, below the capability of labor
• The natural unemployment rate represents the hypothetical
unemployment rate that is consistent with aggregate production
being at a long-run level.
Stability of Foreign Exchange
Comparison of wealth of a nation in terms of currency with
that of another nation/ country.
An exchange rate thus has two components, the domestic
currency and a foreign currency, and can be quoted either
directly or indirectly
Economic Growth
Economic Growth Rate Yt = (Yt – Yt-1) x100
Yt-1
Change in market value of good and services
• Monetary Policy Issues in Pakistan
a- Establishment of SBP and early monetary policy
b-Autonomy of the Central Bank
c-Nationalization of Banking Sector
d-Islamic Banking
e-Privatization of Banking Sector
f- Development Financial Institutions(DFIs)
g- Burden of Non-Performing Loans
f- Banking Sector and Economic Growth
Monetary Policy Management in Pakistan
Pre-Reform (1984 – 1990)
Era of Reforms (1990–1997)
Post Reforms (1998 – 2011)
Thank You