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Lecture Presented By: Ms.

Sobia Ehsan

Lecture Objectives
Defining Monetary Policy Monetary Policy Objectives Monetary Policy Instruments Overview of recent trends in Monetary Policy of Pakistan.

Monetary Policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money with a view to achieve specific economic objectives.

Objectives of Monetary Policy


Economic growth Price stability in the economy Control unemployment Stabilization of business cycle Interest rate stability Exchange rate stability

Types of Monetary Policy


1. Inflationary Monetary Policy
To control inflation Tightening money supply

2. Deflationary Monetary Policy


To boost up inflation Expanding money supply

Monetary Policy Instruments


1. Quantitative Instruments

Numeric benchmarks Ratios/ limits


No numeric benchmarks Regulations/ guidelines

2. Qualitative Instruments

Quantitative Instruments
Open Market Operation
Sale/Purchase of Govt. Securities on behalf of treasury to control inflation/ deflation respectively.

Quantitative Instruments (Cont.)


Bank Rate Policy
Traditional approach:- the rate on which central bank discounts and rediscount the eligible bills. Todays approach:- the minimum rate on which central bank provides financial accommodation to commercial banks.
Higher the BR Lower the BR To decrease money supply To increase money supply

Quantitative Instruments (Cont.)


Cash Reserve Ratio
Commercial bank has to keep a certain percentage of his deposits with central bank.
Higher the CRR Lower the CRR To decrease money supply To increase money supply

Quantitative Instruments (Cont.)


Statutory Reserve Ratio
Commercial bank is to keep a certain percentage of his deposit as liquid asset.
Higher the SRR Lower the SRR To decrease money supply To increase money supply

Qualitative Instruments
Marginal Requirements Moral Suasion Restriction on advances Direct Action Consumer Credit Regulations

A Schematic Diagram of Monetary Policy


Policy Instruments
Qualitative Quantitative Rates Rationing Money Supply Economic growth Price stability Control unemployment

Intermediate Targets

Reserves

Interest Rate Price Level

Operating Targets

Final Target

Stabilization of business cycle Interest rate stability Exchange rate stability

Monetary Policy in Pakistan


Contractionary Monetary Policy Pakistans monetary policy aims to:
Bring inflation down Keep financial markets stable Build foreign exchange reserves Promote macroeconomic stability.

Concluding Note
Mix of various instruments. The best trade off between various objectives. Short term to long term objectives. Aligned with other macro economic policies.

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