Friday, March 5, 2010

objectives of monetary policy

objectives of monetary policy are not different from the objectives of economic policy. along with the change in time, the objectives of economic policies will be of different types according to various situations. the structure of the economy, the economic structure and the level of economic development can make the objectives of the monetary policy different. in such a situation, the central bank which is the representative of the body having monetary authority, while deciding the monetary policy and the preferences of the objectives, has to be careful and thoughtful. the determined preferences should be related to the economic state of the country. these should be changed from time to time. therefore, at the same time different countries will implement different monetary polices to fulfill different objectives. in general, the objectives of monetary policy in underdeveloped countries can be divided into the following five types:
1. exchange stability
the main objectives of monetary policy is to establish stable exchange rate. during the rate of "gold standard" the objectives of monetary policy was to establish stable exchange rate to maintain the balance of payment. instability in the exchange rate would become a big problem in the balance of payment. this would create instability in different sectors like, production, price, employment, etc. therefore, in the nineteenth and the twentieth centuries the objective of monetary of every country was to stabilise the exchange rate. instability in the exchange rate would badly affect the international trade because this would encourage speculation and hinder the economic development. therefore, if any country, involved in international trade, maintains stable exchange rate, then there will be a positive effect in international trade and balance of payment. so according to these various reasons the main objective of the monetary policy is to establish stable exchange rate.
after the "great economic depression" of the 1930 s, it highlighted that the stable exchange rate. should not be maintained. if price remains stable in all countries then stability in exchange rate won't have any negative effect. but in all countries of the world the prices of goods change unequally. in such a situation, if stability in the exchange rate is established, then difficulty will arise in internal price and the situation arises for keeping both the exchange rate as well as internal price stable. to be free from these problems, the change in the exchange rate between the domestic and foreign currencies can be brought about through the means of "devaluation" and "revaluation". since regular change in the exchange rate can create uncertainty, the objective of the monetary policy should be to maintain stability in the exchange rate.
2. price stability
the second important objective of the monetary policy is to maintain stable price. instability in price creates instability between employment, business, production, debtors and creditors. if price increases in the economy, then inflation occurs and if price decreases, then deflation accrues. in the state of inflation the people having fixed income i.e., wage, earners, salary earners, people investing on securities and creditors will have to face a big economic crisis. this will create difficulty in every sector of the economy. if the producers, businessman, debtors and shareholders will face economic crisis. this will even paralyse the economy. in addition to various economic difficulties, due to change in price of goods and services, unequal distribution of national income , unemployment as well as hindrance will occur in the economic development. so, to remain free from inflation and deflation as a result of change in price of goods and services the main objective of the monetary policy is to maintain stable price.
the monetary official has to control the quantity of money in use in a country and the quantity in order to check the comprehensive change in the internal price level. price stability, does not mean that the prices of all goods and services should always be maintained at the same level. if is to maintain reasonable stability in the general price level. if money flow increases along with the change in the level of employment and production that establish the price stability, then there won't be a large change in the price level. price stability can be maintained by increasing the flow of the money according to the requirement of the economy. for this, the commercial banks and unorganized money markets should follow appropriate policy as directed by the central bank which is in the from of authorized monetary official.
3. full employment
according to Keynes, the main objective of the monetary policy is to obtain full employment. full employment is necessary to maintain economic stabillity. through this, stability in the exchange rate can also be brought about. the state of full employment means availability of employment for all those people who are willing to work at prevailing or appropriate wage rate. that is, the state of full employment which means the demand for labour exceeds the supply of laborer. in other words, the state of full employment is that state in which demand for labour more than the supply of labour. in such a situation, the state of labour market will be favourable for the labour-buyers. but in such a situation there can be seasonal unemployment, voluntary unemployment and frictional unemployment. in the state of full employment, the mobilisation of all reasources available in the country will be optimum and the national income will also be maximum.
4. neutrality of money
neutral money creates disequilibrium when monetary change takes place in the economy. this is because when quantity of money increases in the economy, the demand for goods and services also increases. but quantity of goods and services won't increase immediately and as a result price level will increasing creating inflation. contrary to this, if quantity of money is decreased, then demand for goods and services can't be decreased immediately as the decrease in demand. as a result, the price of goods and services will decrease creating deflation in the economy. thus, both inflation and deflation will create disequilibrium between demand and supply in the economy. to control instability that occurs in the economy, the quantity of money has to be stabilised. according to the concept of neutral money, the quantity of money has to be controlled in such a way that there should not be any change in aggergate production, aggergate buying and selling, price level of goods and services, etc. so neutrality of money brings about the state of stability and equilibrium in the economy. if any changes occur, then that should only be due to technical changes. so, according to neutral monetary policy in any country when distributing economic resources in various activities of production there should not be any good or bad effects. the state of inflation and deflation will occur in the economy when the neutral money policy is not implemented. therefore, to remove this or to stop this from occurring neutral money policy has to be implemented.
5. economic growth
the objective of monetary policy should be to accelerate the economic growth of a country. economic growth is a long-run process. the objective of economic policy is to bring about continuous growth in production, income and employment. this will improve the living standard of the people of a country. for the fulfillment of this objectives, implementation of monetary policy is very necessary.
in developed countries, the main objective of the monetary ,policy is to maintain economic stability. but in underdeveloped and developing countries, the main objective of the monetary policy is the economic growth through acceleration in economic development. through economic development under the objective of economic growth is well developed in the developed countries, there exists a great problem in poor countries. economic growth occupies an important position in the policy of free economic and political organization. in free economy, the objective of the monetary policy is to increase demand along with the supply of goods and services with the economic growth.
in underdeveloped countries the long-run economic structure should be changed by controlling economic ebb and flow through monetary policy. this will accelerate economic development to some extent. for this the government has to work with "deficit budget" policy to increase insufficient investment. such "deficit budget" is fulfilled with internal and external loans and resources are mobilized to optimum scale. the objective of the monetary policy should be to expand industries with the increase in income and saving. this will involve all sectors of the economy actively and economic development will be accelerated.

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