Saturday, August 22, 2009

Monetary Policy and its Objectives

The monetary policy of a country consists of various measures usually taken by its Central Bank but ultimately reflecting Government policy to seek to influence the supply of and demand for money and the various uses to which loanable funds may be put. The objectives of monetary policy are achieved through influencing the lending policies of banks which affect the flow of purchasing power and its direction in the country.
The main objectives of monetary policy may be divided into two broad categories.
(i) Those of minor scope: This category includes such objectives as stabilisation of money market, protection of the monetary standard, elimination of undesirable fluctuations in foreign exchange rates, maintaining stability of inter prices, avoidance of undue fluctuations in interest rates etc. These objectives, however remain in the background of the monetary policies of the present day economies and are subordinated to the major objectives, and hence are given comparatively small importance.
(ii) Those of major scope: The major objectives of monetary policy have varied under difference monetary systems, under the gold standard, safeguarding the gold reserve from internal and external drains was given the chief importance. During the thirties of the present century the major objective of monetary policy was considered to be achievement and maintainance of full employment. This was natural in view of the universal phenomenon of unemployment prevailing during the Great Depression. During World War II and the post war period control of inflation become a major task. One may say that some thing out of business fluctuation has remained one of the major objectives of monetary policy, particularly in the industrially developed countries. Closely connected with this has been the objective of Cheoxing the tendency towards that is called “secular stagnation” and to impart a healthy buoyancy to the economy. At present the problem of inflation dominates the scene almost everywhere outside the socialist world. For less developed world the major objectives of monetary policy has been to promote activities resulting in economic development or optimum utilisation of their material and human resources. In Pakistan monetary policy must be geared to the needs of her planned economic development in addition to tackling the current problem of high inflationary pressure.

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