Effectiveness of Monetory Policy

Topics: Inflation, Monetary policy, Central bank Pages: 16 (3681 words) Published: August 9, 2014
 
A Term Paper on
Effectiveness of Monetary Policy in ensuring Price Stability & preserving the value of local currency: in the case of developing countries.

Submitted To:
Prof. Mohammed Farashuddin PhD
Visiting Professor
Department of Banking & Insurance
University Of Dhaka
 

Submitted by: Nazrul Islam ID: 51223060, MBA (Evening Program) Department of Banking & Insurance University Of Dhaka  

Table of Context

i) Abstract………………………………………………… ii) Objective of the Study………………………………… iii) Specific objective………………………………………. iv) Introduction…………………………………………… v) Background Analysis………………………………….. vi) Literary Review………………………………………… vii) Classical quantity Theory of Money…………………. viii) Monetarist Policy Theory……………………………… ix) Tools of Monetary Policy………………………………. x) Monetary Policy Instrument…………………………… xi) Failure of Monetary policy in Developing Countries…

xii) Conclusion………………………………………………. xiii) Recommendation……………………………………….. 1. Abstract

Monetary Policy is the deliberate control of base money supply, M and in specific instances, credit conditions with a view to realizing macroeconomic policy objectives such as price stability ( in large manner), GDP growth and employment generation.  Various studies have reflected the existence of a positive relationship between the increase of money supply and the level of inflation. Generally, this is reflected by the continued rise of prices of the various products. A situation ensues where excess amounts of money tend to be chasing too few goods. In this perspective, this study tested on whether monetary policy is an effective tool in the combating of inflation and ensuring price stability. The first and foremost objective of the central bank is to formulation and implementation of the monetary policy for maintaining the values of local currency. Otherwise the living standard of the general people may go down.

This study finds out the money supply has a direct impact on the level of inflation. Statistically, money supply has a statistical significance on the level of inflation in the country. Thus, monetary policies aimed at controlling the amount of money supply in the economy, have a tremendous impact on controlling the level of inflation  

2. Objectives of the Study

The objectives of the study revolved around exploring the significance and the suitability of the monetary policy in realizing macroeconomic goals. Some of these macroeconomic objectives included price stability, economic growth, full employment, and a favorable balance of payment. 

3. Specific Objective

Find out the effectiveness of monetary policy in ensuring price Stability & preserving the value of local currency by combating of inflation.   

4. Introduction

Since time immemorial, inflation has always been an issue of extreme sensitivity. This accrues to the fact that a case of inflation has overall effect on the prices of commodities. An instance of spiraling, uncontrollable inflation is usually a sign of impending catastrophic doom. Thus, the control of monetary policy has turned out to be an essential function of all governments in the world. Inflation does not necessarily have to be reflected a continued increase in the prices of commodities (hyperinflation), the vice versa can also be a reflection of inflation (deflation). However, both situations are more than unhealthy for the economy. In most economic situations, the major reasons for the inception of inflation are a culmination of excessive demand for products. The necessary economic policy would thus be entrenched on looking at the causes of an unnecessary rise. This way, they can thus be able to come up with the right measures that can aid in...
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