8/16/2019 Functions & Importance of Monetary Policy

1/3

COX’S BAZAR INTERNATIONAL UNIVERSITY

Monetary Policy of Banla!e"#

Impacts & Implementations

This article is the partial fulfillment of the course “Macroeconomics” in 4th semester.

8/16/2019 Functions & Importance of Monetary Policy

2/3

$UNCTIONS % IMPORTANCE O$ MONETARY POLICY

Monetary policy in term context has a liberal meaning. According to new Palgrave

Dictionary of Economics defines monetary policy as “actions taken by central banks to

affect monetary and other financial conditions in pursuit of the broader obectives of 

sustainable growth of real output! high employment! and price stability".

#n developed economies! monetary policy is usually cramped two activities in one policy

instrument $typically a short%term interest rate&! and typically central banks possess a

narrow mandate $normally a principal or special obective of price stability&. #n

developing economies! central banks possess a tendency to use more than one policy

instrument and commonly follow several obectives.

'o impact the supply and demand for commodities! services and labor! central banks use

monetary policy. 'here are four key legal documents through which monetary policy is

implemented! which are as follows% credit! interest rates! exchange rates! and wealth.

(ith the right adustment in monetary policy! a central bank controls the banks) capacity

of lending money! the foreign exchange rate! asset values! and especially supply of money

in an economy. (hen a central bank controls the lending capacity of banks! they actuallymanipulate the amount of credit used by households! businesses! and the government.

Any changes in the money supply also influence the value of money! for example! interest

rate influences the savings and borrowing decisions of the mass people. Monetary policy

also has an impingement on the rate of exchange and asset values! which likewise put on a

large impact on borrowing! expenses! and saving choices of common people.

'he way in which monetary policy affects employment varies significantly from country

to country. *nfortunately in many developing nations there have been few studies

conducted by central banks exploring the relationship between monetary policy and

employment. #n the face of doubt about the nature of the connection between monetary

 policy and employment! it is usually accepted that monetary policy has an important

influence on local economic activity and employment.

1

Date of Submission: 23rd May, 2016

Submitted

Submitted

N&r&" Sai'a++A ,nd +atch

#D- ,/0,///1aculty of +usiness AdministrationCo(’" Ba)ar International Uni*er"ity

S M Ra+i,&l An-ar

2ecturer 

1aculty of +usiness AdministrationCo(’" Ba)ar International Uni*er"ity

8/16/2019 Functions & Importance of Monetary Policy

3/3

3ommonly speaking! central banks in developing economies fall into two broad types.

'hey either focus only on upholding price and financial stability! or they pursue a range of 

goals! which may take in! in addition to stability! high economic growth or development.

4tability fixated central banks aim to uphold price and financial stability. 'his makes an

secondary contribution to employment! in that it is more conducive to ob creation than an

environment of unstable prices and financial conditions. 3entral banks with a growth or 

employment obective also pay close attention to price and financial stability! but they

tend to actively use monetary policy when they believe that economic growth or 

employment are below desired levels. 'his can differ from the approach of a stability%

focused central bank under which monetary policy may remain passive or unresponsive to

weak economic growth or employment in cases where stability may be put at risk.

'here is no definitive answer as to whether an exclusive central%bank focus on stability or 

a broader mandate is better for ob creation and development. Each approach has both

 benefits and drawbacks $this is discussed in greater detail below&. #n 2atin America! there

are examples of rapid gains in productive employment and development after central

 banks scrapped broader mandates and focused exclusively or primarily on stability $e.g.

the performance of +ra5il and 3hile after central banks adopted inflation targets&. #n Asia!

there are examples of rapid development over the past two decades assisted by central

 banks pursuing a range of obectives $e.g. 3hina and #ndia&.

2 | P a g e