An Assignment

On
MONETARY POLICY OF
BANGLADESH
Course Title: Maroeo!o"is
Course Co#e: MBA: $%&
S'BMITTED TO
Pro(essor A)#ul Ba*es
Course i!strutor
Masters o( Busi!ess A#"i!istratio!
East +est '!i,ersit*-
S'BMITTED BY
M#- .............
ID: ...............
Date o( Su)"issio!/ 01/&2/0&%3
Table of contents
Sl. No. Contents Page no
1. Introduction 1
2. Rational of the Study 1
. !ethodology 1
". !onetary Policy 2
#. Reason of Publishing !onitory Policy Statement 2
$. Ob%ecti&e of !onetary Policy
'. Ty(es of !onetary Policy "
). !onetary Policy in *angladesh "
+. Tools , Strategy of !onetary Policy #
1-. !a%or Tools .sed by *angladesh *an/ #
11. Policy Target '
1. 0imitation of !onetary Policy )
1". 1indings of The Study )
1". Conclusion +
1#. *ibliogra(hy 1-
Introduction
Monetary policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of promoting economic
growth and stability. The official goals usually include relatively stable prices and low
unemployment. Monetary theory provides insight into how to craft optimal monetary policy.
It is referred to as either being expansionary or contractionary, where an expansionary policy
increases the total supply of money in the economy more rapidly than usual, and
contractionary policy expands the money supply more slowly than usual or even shrinks it.
Expansionary policy is traditionally used to try to combat unemployment in a recession by
loafing interest rates in the hope that easy credit will entice businesses into expanding.
ontractionary policy is intended to slow inflation in hopes of avoiding the resulting
distortions and deterioration of asset values. In this report I tried to show that how monetary
policy is related to the economy of our country ! how it works in our country.
Rationale of the Study
The case study is assigned by our course instructor "rofessor #bdul $ayes as a part of our
!acroeconomics% course. The topic of our case study is !onetary Policy in
*angladesh%. $y conducting this study I can enhance our knowledge and skill to apply
various research methods in professional life on higher educational life. The study has given
us a chance to raise our &uality in developing research instrument and its applications.
!ethodology
"rimarily I used the concept of the course, information of the case study.
Sources of 2ata
'ere the secondary sources of information are used. The secondary sources are(
$ooks.
)ebsite.
*
!onetary Policy
!onetary (olicy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of promoting economic
growth and stability. Many economists have given various definitions of monetary policy.
#ccording to Prof. 3arry 4ohnson, +# policy employing the central banks control of the
supply of money as an instrument for achieving the ob,ectives of general economic policy is
a monetary policy.+
#ccording to A.5. 3art, +# policy which influences the public stock of money substitute of
public demand for such assets of both that is policy which influences public li&uidity position
is known as a monetary policy.+
-rom these definitions, it is clear that a monetary policy is related to the availability and cost
of money supply in the economy in order to attain certain broad ob,ectives. The entral $ank
of a nation keeps control on the supply of money to attain the ob,ectives of its monetary
policy
Reasons of Publishing !onetary Policy Statement
The entral $ank of $angladesh publishes the monitory policy. The reasons for publishing
monetary policy statement are given bellow(
To support the government.s goal of faster inclusive economic growth and poverty
reduction, besides maintaining monetary and price stability.
To achieve an inclusive economic growth by facilitating productive sectors while
keeping inflationary pressure under control. $y fixing inflationary rate the authority
trying to increase the outcomes using the maximum infrastructure of the productive
sectors which will contribute in the national income.
To discourage credit flows to unproductive sectors whereas increasing credit flow to
productive sectors. #s we all know by increasing dependence on domestic goods and
decreasing dependence on imported goods one country can go up to our expectations.
/
It is set to strengthen its oversight on li&uidity, capital ade&uacy and risk management
in banks and financial institutions to protect the domestic financial sector from
instabilities of the kind now afflicting markets in advanced economies etc.
Ob%ecti&es of !onetary Policy of *angladesh
The ob,ectives of the Monetary "olicy in $angladesh are to attain growth, stability and
social ,ustice among the country. #fter the 0eynesian revolution in economics, many people
accepted significance of monetary policy in attaining following ob,ectives(
Ra(id 6conomic 5ro7th8
It is the most important ob,ective of the monetary policy. The monetary policy can influence
economic growth by controlling real interest rate and its resultant impact on the investment.
Price Stability8
The monetary policy having an ob,ective of price stability tries to keep the value of money
stable. It helps in reducing the income and wealth ine&ualities.
69change Rate Stability8
Exchange rate is very volatile leading to fre&uent ups and downs in the exchange rate, the
international community might lose confidence in our economy. The monetary policy aims at
maintaining the relative stability in the exchange rate.
*alance of Payments :*OP; 6<uilibrium:
$angladesh $ank through its monetary policy tries to maintain e&uilibrium in the balance of
payments 1$2"3. The $2" has two aspects i.e. the 4$2" 5urplus4 and the 4$2" 6eficit4. If
the monetary policy succeeds in maintaining monetary e&uilibrium, then the $2"
e&uilibrium can be achieved.
1ull 6m(loyment8
4-ull Employment4 stands for a situation in which everybody who wants ,obs get ,obs.
'owever it does not mean that there is a 7ero unemployment. In that senses the full
employment is never full. Monetary policy can be used for achieving full employment. If the
monetary policy is expansionary then credit supply can be encouraged.
Neutrality of !oney8
8
The monetary policy should regulate the supply of money. The change in money supply
creates monetary dise&uilibrium. Thus monetary policy has to regulate the supply of money
and neutrali9e the effect of money expansion.
6<ual Income 2istribution8
Monetary policy can make special provisions for the neglect supply such as agriculture,
small:scale industries, village industries, etc. and provide them with cheaper credit for longer
term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary
policy can help in reducing economic ine&ualities among different sections of society.
Ty(es of !onetary Policy
!onetary Policy in *angladesh
#s stated in the $angladesh $ank 2rder *;</, the principal ob,ectives of the country4s
monetary policy are
1. To regulate currency and reserves=
2. To manage the monetary and credit system=
. To preserve the par value of domestic currency=
". To promote and maintain a high level of production, employment and real income=
#. To foster growth and development of the country4s productive resources in the best
national interest.
>
#lthough the long term focus of monetary policy in $angladesh is on growth with stability,
the short:term ob,ectives are determined after a careful and realistic appraisal of the current
economic situation of the country.
?
Tools and Strategy of !onetary Policy
Ma,or instruments of monetary control available with $angladesh $ank are the bank rate,
open market operations, rediscount policy, and statutory reserve re&uirement. The methods of
credit control can be classified as follows(
=uantitati&e> 5eneral !ethods =ualitati&e> 5eneral !ethods
@*. $ank rate policy @*. Aationing of credit
@/. 2pen market policy @/. 6irect action
@8. Bariation of reserve ratio @8. Aegulation of consumers. credit
@>. Moral persuasion
@?. "ublicity
!a%or !onetary Policy Instruments .sed by *angladesh *an/
*an/ rate8
$ank rate, also referred to as the discount rate, is the rate of interest which a central bank
charges on the loans and advances that it extends to commercial banks and other financial
intermediaries. hanges in the bank rate are often used by central banks to control the money
supply. The rate which central bank lends money to the commercial banks and discounts bill
of exchange is called bank rate. If central bank increases the bank rate then the commercial
banks will increase their marker of interest rates. #s a result the borrowers borrow less form
commercial banks and amount of credit reduces in the economy. In an opposite way amount
of credit will be increased in the country.
O(en mar/et o(erations8
2pen market operations are the means of implementing monetary policy by which a central
bank controls the short term interest rate and the supply of base money in an economy, and
thus indirectly the total money supply. This involves meeting the demand of base money at
the target rate by buying and selling government securities, or other financial instruments.
Monetary targets such as inflation, interest rates or exchange rates are used to guide this
implementation. $$ mainly in,ects or withdraws reserves from the banking system through
open market operations 12M23. This is pursued in two ways(
The first ty(e is:
C
The outright purchase or sale of approved securities through weekly auctions in volumes
consistent with the growth paths for AM and M/ targeted in the annual monetary program.
$$ in,ects reserves into the banking system by purchasing approved securities and withdraws
reserves from the banking system by selling them. $y ad,usting the amount and the officially
acceptable interest rate at auctions, $$ influences the successful bidding rate, and the
subse&uent public announcement of this rate can convey its intention regarding shortterm
interest rates. -or instance, if $$ intends to raise short:term interest rates, it increases the
scale of its auction in absorbing operations and raises its internally acceptable bidding rate so
as to push up the successful bidding rate of the auction and thus mop up excess li&uidity from
the banking system, which influences short:term interest rates. #ny significant changes in the
interest rate may persuade the stockholders to recalculate their return through dividend
discount window and may react accordingly.
The second ty(e is?
2pen Market 2perations 12M23 is repo 1repurchase agreement3 and reverse repo auctions. In
order to facilitate li&uidity management on a day:to:day basis, $$ goes for second type of
open market operation, either through repurchase agreement 1repo3 to temporarily add
reserves or through reverse repurchase agreements 1reverse repo3 to temporarily withdraw
reserves. Aepurchase agreements are essentially short:term loans collaterali9ed by underlying
approved securities. $$ buys the underlying assets for a given price with an agreement by the
selling institution to buy it back at a specified date and price. #s the counterpart of repo
auctions, $$ accepts excess funds from the banks in ascending order of interest rates to the
extent needed to maintain the intended level of li&uidity. It can be mentioned that $$ has
introduced repo and reverse repo operations from Duly /@@/ and #pril /@@8 respectively.
Im(acts of the O(en !ar/et O(erations :O!O;8
Aeverse repo and repo interest rates are $$.s day to day instruments influencing the growth
path of reserve money, ultimately to influence inflation via growth path of broad money.
Aecently, in the backdrop of the global economic slowdown the routine reverse repo
operations are also being used sparingly, to keep credit conditions easy=
<
The Policy Target:s;
In this backdrop it is necessary that the monetary policy framework be articulated for greater
clarity and transparency benefiting both the policy makers and the stakeholders. # policy
system, where the goals are transparent and their achievement verifiable, directly adds to the
credibility of the central bank, a ma,or ob,ective of this document is to define such a
framework. In contrast, however, the challenge in the developing world is how to augment
the capacity output through both productivity growths as well as via the installation of
additional capacity. 'ence the appropriate monetary policy strategy in the $angladesh
context would be to achieve the goal of price stability with the highest sustainable output
growth.
Inflation Target8
It is the general wisdom that monetary policy tools are of immediate influence in controlling
inflation. 'owever, contemporary evidence amply illustrates that monetary policy cannot
deal well with the inflationary impact of external shocks such as the recent international price
of oil ! related energy products. Many central banks as a conse&uence focus on the core
inflation which is typically constructed by subtracting the most volatile components 1e.g.
food ! energy prices, indirect taxes, etc.3 from the consumer price index 1"I3. #s a policy
goal, core inflation may be a more credible target then "I inflation. )hile there is no
standard measure of core inflation in $angladesh context at this time, the construction
methodology is made complex by two facts. -irst is that food items constitutes nearly C@E of
the "I index, and while the appropriate commodity group weights may re&uire a re:think, to
ignore food entirely in defining the core inflation may render the construction a bit like
throwing the baby away with the bath water. 5econdly, in $angladesh context, the volatility
of the international energy prices appear not to filter down to the "I since the relevant
domestic prices is subsidi9ed by the state. "eriodic ad,ustment in administered energy prices
have always lagged the world market changes in both the time line as well as in magnitude
often most dramatically. )hile it may be useful to focus on the non:food component of the
index 1which occupies only >*.CE of the full "I3 in order to gauge at the build:up of
underlying inflationary forces in the economy, it would be unwise to treat this alone as a valid
measure of core inflation.
F
5ro7th target8
G6" growth pro,ections of the Medium Term Macroeconomic -ramework 1MTM-3 in the
government4s Hational 5trategy for #ccelerated "overty Aeduction 1H5#"A3, modified
appropriately in the light of unfolding actual developments, are used as output growth targets
for the purpose of monetary policies.
0imitation of !onetary Policy in 2e&elo(ing Country
In developing country like ours, monetary policy suffers from the following limitations Iin
under developing countries, and capital markets are narrow and unorgani9ed. 5imilarly, in the
situations, the instrument the reserve re&uirement does not function properly. $y its nature,
monetary policy is not effective in the short run. The role of monetary policy is not
compulsive but permissive. This seriously limits the efficiency of monetary policy in
backward countries. In under developed society where li&uidity trap is in existence monetary
policy cannot work efficiently. #dministrative honesty and firmness are not very rigorous in
less regular countries which reduce the efficiency of monetary policy a policy a lot. Jastly,
the lag between the decision about a particular policy and its implementation also hinders the
monetary policy in its success. 'ere we found that monetary policy suffers from various
limitations in the developing country. 5o, it should be supplemented by fiscal policy to make
it effective. 6espite this information, monetary policy sets the tone of economic development
in recent years.
1indings of the Study
The intension of this study is to know how to work with digital information system. The
ma,or findings of the overall study are discussed below(
2b,ectives of the monetary policy.
Tools of monetary policy used by $angladesh $ank.
Aeason behind publishing the monetary policy.
0now about the bank, interest, repo, reverse repo, etc.
The overall economic ! monetary scenario of $angladesh.
;
Conclusion
The Monetary "olicy 5tatement 1M"53 is intended to outline the ob,ective and the modalities
of formulation ! conducting of monetary policy by the $$, its assessment of the recent and
the expected monetary and price developments, and the stance of monetary policies that will
be pursued over the near term. 2b,ectives of the monetary policies of $$ as outlined in the
$angladesh $ank 2rder, *;</ comprise attainting and maintaining price stability, high levels
of production, employment and economic growth in such a directed regime with little or no
role of financial prices in influencing the magnitudes or directions of credit the present M"5
provides the monetary policy stands that $$ intends to follow during first half of -K*8:*>.
The prime ob,ective of the policy stance is to balance the economy and aim at controlling
inflation and achieving the expected G6". The policy stance takes into account recent
developments in real, external, fiscal ! monetary sectors of the economy and the near term
macroeconomic outlook for the remaining period of -K*8:*>.
*ibliogra(hy
*oo/s
-rederic 5. Mishkin= LThe economics of Money, $anking, and -inancial Markets.= <
th
Edition.
1International Edition( "earson $ook ompany, /@@F3.
@eb Sites
1. 777.bb.org.bd
2. 777.mof.go&.bd
. 777.economy7atch.com
". 777.en.7i/i(edia.org
*@