Understanding
Monetary Policy
Monetary policy is how central banks manage money supply
and credit. The goal is sustainable economic growth. This
includes stable prices and full employment. This
presentation covers its goals, tools, and impacts.
by: Shashank Mishra 2023/18/110
Sakar Kaushik 2023/18/103
Goals of Monetary Policy
Price Stability Full Employment Sustainable Growth
Maintain low and stable Achieve maximum Foster conditions for long-term
inflation. For example, a 2% employment. An example is 4- economic expansion.
target is common. 5% unemployment. Preventing extreme ups and
downs in economic cycles..
These goals are interconnected. Successfully achieving them ensures a strong economy.
Tools of Monetary Policy
•Open Market Operations (OMO)
Buying/selling government securities to increase or decrease money supply.
Repo Rate
The rate at which the central bank lends money to commercial banks.
Lowering repo rate = cheaper loans = more money in economy.
•Reverse Repo Rate
The rate at which banks park their money with the central bank.
Increasing this encourages banks to keep money with the central bank,
reducing money in circulation.
Cash Reserve Ratio (CRR)
The percentage of a bank's total deposits that must be kept with the central bank.
Higher CRR = less money for banks to lend = less money in economy
Bank Rate
The rate at which the central bank lends to banks without repurchase agreement.
Central banks use these tools to influence economic activity.
They adjust them based on economic conditions.
Expansionary Monetary
Policy
Lower Interest Rates
Encourages borrowing and investment.
Increase Money Supply
Stimulates economic activity.
Purpose: To increase money supply, encourage borrowing
and investment, and boost consumption, leading to more
economic activity, job creation, and growth. Example:
Quantitative easing during crises. This includes the 2008
financial crisis and COVID-19. This helps to inject liquidity
into the market.
Contractionary Monetary Policy
Raise Interest Rates
1 Reduces inflation.
Decrease Money Supply
2 Slows down economic growth.
Example: Volcker Shock in the 1980s. This was used to combat high inflation. This helps to cool down the
economy.
Impact of Monetary Policy
Interest Rates Economic Growth
Inflation Employment
2 3
1 4
Transmission mechanisms exist. These include the interest rate channel and credit channel. The exchange
rate channel also plays a role.
Challenges and
Limitations
Time Lags Liquidity Trap
Delayed impact makes Lowering rates is
managing the economy ineffective if loan
hard. demand is low.
Global Interconnectedness
Domestic policy is affected by international factors.
These challenges make policy decisions complex. Central
banks must consider many factors.
Recent Trends and Future
of Monetary Policy
Inflation Management
Focus after COVID-19.
Digital Currencies
Impact on monetary policy.
Inclusive Growth
Focus on climate change.
Monetary policy is evolving. It adapts to new economic realities.
It now considers digital currencies. It also addresses inclusive
growth. These trends shape its future.
