Monetary Policy Of Pakistan

Definition: Monetary policy is concerned with deciding how much money the economy should have or perhaps more correctly deciding whether to increases or decrease the purchasing power of money. According to Macconal:

Changing the money supply to assist the economy to achieve a full employment

Objective Objectives are classified in two aspects Under developed countries Developed countries Under developed countries o achieve full employment o have high !fficiency o have large scale of resources mobili"ation o increase !#ports o have high investment o provide price and e#change stability o have efficient allocation and utili"ation of resources o raise living standards

Developed countries o have high aggregate demand without inflation !radicate inflationary and deflationary gap $igh research% further development

&roviding assistance to other countries 'aining monetary control over others

Tools of Monetary Policy

Quantitative Tools Open Mar(et Operations )an( *ate Cash *eserve *e+uirement ,i+uidity ratio -pecial deposit Qualitative Tools Credit rationing Credit ceiling Moral persuasion Direct action .dvertisement

Targets for monetary policy: !mployment/ economic growth/ and in0ation can not control directly/ it must choose settings/ or targets/ for variables that it can control in order to best achieve its goals. 1n practice/ there are two types of targets2

3. Money supply targets. 4. 1nterest rate targets.

Targets for monetary policy

Money upply targeting

Over vie! of different economist:

Classical 5eynesians Monetarists

Demand for money is simply Demand for money for three motives for spending on forcible ransaction transition &recautionary -peculative 6ull employment .lways full employment is not possible

Demand for money related to demand for holding wealth in other forms. money is direct substitute of wealth

M- has a direct proportional Ms has a direct but not proportion relationship with price relationship with price

1ncrease in Ms result in low 7i8 with no increase in M- will directly change immediate effect on 91 in 91 and & / with the : remain constant 1f people do not want to hold money/ theypeople will possibly invest it to would invest it to earn interest earn interest /they may also use it invested to buy e+uities or physical assets ;ages 7r8 upward downward fle#ible .'- is vertical ,aisse" fair and ;ages 7r8upward fle#ible and down ward rigid .'- is positive 'overnment intervention and

-aving and income are the -aving depend on income function of interest rate investment on interest rate

Changes in M- caused by changes in 91 Changes in M- cause changes in the money value of 91

"arious Monetary policy of #P in different years 1n 4<<<=<3 ;ith the free fall of the *upee in mid=-eptember 4<<</ -)& had to tighten its monetary policy to defend the e#change rate 1n 4<<3=<4 he tight monetary discipline visible in 6><3 was perceptibly eased in 6><4. 1n4<<4=<? a substantial increase in the annual e#ternal account surplus and the easier monetary stance of the -)& left the money mar(et wash with li+uidity during 6><? 1n 4<<@=<A During 6><@ the thrust of monetary management was towards aligning the mar(et e#pectations with monetary policy stance. 1nitially during 6><@ when interest rates were under downward pressure 1n 4<<A=<B .pril 4<<A in response to the headline when inflation reaching at 33.?C/ -)& remains in monetary tightening phase

1n 4<<B=<DDuring Euly=.pril 3@/ net credit to private sector grew by *s4BB.@ billion 7or 34.B C8 against *s ??F.D billion 7or 3F.G C8 in the corresponding period of 6><A Despite li+uidity in the system 1n 4<<D=<G -)& will be closely monitoring the economic developments and outloo( for 6><D and will ta(e appropriate actions as and when re+uired in pursuit of maintaining the objective of price stability without prejudice to economic growth. 1n 4<<G=<F he tight monetary policy was continued by -)& under the macroeconomic stabili"ation programme and discount rate was raised by 4<< bps on 3? 9ovember 4<<G resulting in cumulative increase of ?<< bps. 1n 4<<F=3< he overall level of ris( and uncertainty in the economy has increased and the pressure on the fiscal position/ has escalated and growth in the real economy is limited. -tri(ing a balance between monetary and financial stability -)& has decided to support the recovering real economic activity herefore/ effective 4Ath 9ovember/ 4<<F/ the -)& policy rate will be lowered by A< bps to 34.A percent

$onclusion -)& has encountered difficulties to targeting the inflation/ economic growth/ employment and interest rate objectives. but still there are certain difficulties which are a huge hindrance in the way of !conomic &olicy. so -)& can control all hurdles with some suitable policiesHHH.. 7a8 improve its capacity to forecast li+uidity conditions and actively preempt inflationary pressures 7b8 develop a greater understanding of the channels of transmission of monetary policy 7c8 have an increasingly transparent policy framewor(