Objectives of monetary policy in developing countries. Monetary policies in developing countries 2022-10-18
Objectives of monetary policy in developing countries
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Monetary policy is a set of tools and measures used by central banks to regulate the supply and demand of money in the economy. In developing countries, the objectives of monetary policy are often focused on promoting economic growth, stabilizing prices, and maintaining exchange rate stability.
One of the main objectives of monetary policy in developing countries is to promote economic growth. This is often achieved through the use of expansionary monetary policy, which involves increasing the supply of money in the economy through the use of tools such as lower interest rates and increased lending to banks. By making it easier for businesses to borrow money, expansionary monetary policy can encourage investment and stimulate economic growth.
Another important objective of monetary policy in developing countries is to stabilize prices. This is often done through the use of contractionary monetary policy, which involves decreasing the supply of money in the economy through the use of tools such as higher interest rates and reduced lending to banks. By making it more expensive for businesses to borrow money, contractionary monetary policy can help to reduce inflation and stabilize prices.
In addition to promoting economic growth and stabilizing prices, the objectives of monetary policy in developing countries often include maintaining exchange rate stability. This is particularly important for countries that have floating exchange rates, as fluctuations in the exchange rate can have a significant impact on the economy. To maintain exchange rate stability, central banks may use a variety of tools, including foreign exchange interventions and changes to interest rates.
Overall, the objectives of monetary policy in developing countries are designed to support sustainable economic growth, stabilize prices, and maintain exchange rate stability. By carefully managing the supply and demand of money in the economy, central banks can help to create a stable and favorable environment for businesses and consumers.
Top 6 Objectives of Monetary Policy
These will lead to increase in the demand for transactions and speculative motives. According to their version, full employment means absence of involuntary unemployment. By keeping saving-investment equality at full-employment level, it removes the possibility of inflationary and deflationary tendencies. Interest Rate Channel When money supply increases, interest rate decreases, when interest rate decreases, investment is likely to increase, and when investment increases, aggregate demand increases, and employment may be created. ADVERTISEMENTS: The objective of exchange stability is achieved through establishing equilibrium in the balance of payments. To Control Inflationary Pressures: To control inflationary pressures arising in the process of development, monetary policy requires the use of both quantitative and qualitative methods of credit control. It involves the increase in the productive capacity of the economy by developing additional economic resources, improving technology and exploiting new investment opportunities.
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Monetary policy in developing countries: The way forward
The central bank is trying to keep the exchange rate stable through devaluation and revaluation of the currency. For example, under gold standard, the objective of exchange stability was achieved, but the objective of price stability remained unfulfilled. Pellentesque dapibus efficitur laoreet. For this, a shrinking monetary policy can be formulated. The selective credit controls are more appropriate for controlling and limiting credit facilities for such unproductive purposes. Since it constitutes a lost opportunity for the commercial banks, central banks pay them interest on the reserves.
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Role of Monetary Policy in Developing the Economy of a Country
In under-developed economies, governments have to spend on a gigantic scale under the planning process to secure growth rate commensurate with the growth rate of population and also to provide social and economic overheads. Therefore, in such economies, monetary policy can be designed to meet with the problem of under employment and disguised unemployment and by further creating new opportunities for employment. According to him, expansionary fiscal policy should be used to move the economy ahead with price stability and tight monetary policy should be used to keep interest rates high, thereby attracting the capital inflows necessary for maintaining the balances of payment equilibrium without depressing the exchanges rate. The concept of monetary policy has been defined in a different manner according to different economists; R. Nam lacinia pulvinar tortor nec facilisis. It should also organise and develop money an capital market. Since the consumption function is more or less stable in the short period, the monetary policy should aim at raising investment expenditure.
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Monetary Policy in Under
Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Pellentesque dapibus efficitur laoreet. Thus, according to the policy of neutral money, if the money is made neutral and the money supply is kept constant, there will be no disturbances in the economic system. It would have to take on a direct and active role firstly, in increasing or helping to create the machinery needed for financing development activities all over the country, and secondly, in ensuring that the finance available flows in the direction intended. The main differences between the objectives of full employment and economic growth are discussed below: i Full employment means full utilisation of job opportunities within the limits of available resources. Thus in an underdeveloped economy, the monetary authority should control the uses of money and credit by an appropriate monetary policy so that investible resources flow into desirable channels without adversely affecting investment and production. However, the maintenance of stability in the domestic price level and a fixed, realistic exchange rate are very essential preconditions for achieving a maximum rate of sustained economic growth.
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Limitations of Monetary Policy in Developing Economy
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Pellentesque dapibus efficitur laoreet. ADVERTISEMENTS: Besides, the rise in per capita income and increase in population during the development process also increases the demand for money to carry out day-to-day transactions. How can fiscal policy be used to address this? Monetary policy can help in narrowing the balance of payments deficit through high rate of interest. The IMF study concludes by offering its continued support to low- and lower-middle income countries in their process of strengthening and modernizing their frameworks through policy advice on institutional issues, both in surveillance and program contexts, as well as technical assistance and training. It is implied in this model the need to rethink the direction and overall form of economic policy. To sum up, there are number ofLimitations of Monetary.
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Objectives of Fiscal Policy in Developing Countries
Monetary policy in a developing country is an important instrument in the hands of the central bank which may be used to ensure economic growth. The problem before the policy makers is to choose between inflation and unemployment objectives keeping in view the general welfare of the public and weighing the relative benefits and costs of both inflation and unemployment to different sections of the society. Sound principles of monetary policy still apply The study by IMF staff, Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries, aims to provide guidance to this group of countries, and uses the same set of principles that characterize effective monetary policy frameworks in countries with scope for independent monetary policy. On the contrary, when aggregate supply of goods and services exceeds aggregate monetary demand, an expansionary monetary policy should be adopted. On the other hand, an increase in the rate of interest will stimulate savings.
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IMF Survey : Monetary Policy in Developing Countries: The Way Forward
Updated November 24, 2022 What is Monetary Policy? The above stated factors impose a limit on the scope of monetary policy in underdeveloped countries. The policy of neutrality of money is based on the assumption that money is purely a passive factor. Monetary policy is also playing a key role in providing stability to the external sector by improving the balance of payments situation. But in most of the cases, the two objectives of full employments and economic growth come into conflict with each other. Therefore, to maintain stability in the exchange rate, it is considered necessary to maintain stability in the price level.
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[Solved] a. Examine the objectives of monetary policy in...
ADVERTISEMENTS: Role of monetary policy in the economic development of a country are as follows: 1. Besides, a low structure of interest rates minimizes the burden of public debt. Nam lacinia pulvinar tortor nec facilisis. Briefly, the promotional role of the monetary authority in an under developed country may be to improve the efficiency of the banking system as a whole or extend sound credit where needed and to respond promptly to changing conditions. Two intermediate steps lead to this identification: the recognition that monetary policy is concerned primarily with the quantity of money, not with the terms and availability of credit, and that inflation is always and everywhere a result of a rapid rate of increase in the quantity of money. So the problem in these countries is to remove unemployment by providing job to all those who are willing to work.
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The Major Role of Monetary Policy in a Development Economy
This was the main objective under Gold Standard among different countries. A higher rate of interest may, however, be used as a shock tactic to curb speculation in goods and securities when it gets beyond control and other methods have failed to control it. The non-banking financial intermediaries do not keep deposits with the central bank so they are not affected by it. There are, however, certain cases in which the two objectives of exchange stability and price stability become complementary and can be achieved together: i Under gold standard, both these objectives can be achieved if the rules of the game are followed strictly. During depression, prices fall even though there is no reduction in money supply. Thus for speeding up the process of economic development, the monetary policy should aim at the efficient management of public debt which implies proper timing of the issuing of government bonds, stabilising their prices and minimising the burden of debt.
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Monetary policies in developing countries
For example, central banks can purchase Expansionary vs. Economic growth has been defined as the process whereby the real national income of a country increases over a long period of time. The policy of full employment involves giving employment at current wage rates, whereas the policy of economic growth aims at providing employment at ever-increasing wage rate, thus improving the living standards of the people. In a modern economy, monetary expansion is indispensable and money is no more neutral. The ideal solution to this problem must keep in view the following considerations: a Different degrees of priority should be assigned to various objectives in accordance with the economic conditions prevailing in the country and objectives should be chosen which have higher priority and are most suitable for the economy, b While formulating the monetary policy, some degree of compromise among the conflicting objectives is considered better than selecting only one objective and leaving all others, c No objective of monetary policy should be considered permanent and the monetary authority should keep on changing various objectives in accordance with the changing requirements of the economy. Thus, the cost of borrowing in the economy will increase, and the money supply will decrease. An increase in prices of 2 to 4 percent each year is considered by economists to be a necessary increase in price level for economic growth.
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