Functions & Importance of Monetary Policy

COXS BAZAR INTERNATIONAL UNIVERSITY
Monetary Policy of Bangladesh

Impacts & Implementations
This article is the partial fulfillment of the course Macroeconomics in 4th semester.
FUNCTIONS & IMPORTANCE OF MONETARY POLICY

Monetary policy in term context has a liberal meaning. According to new Palgrave
Submitted
Dictionary of Economics defines monetary policy as actions taken by central banks to

affect monetary and other financial conditions in pursuit of the broader objectives of
S M Rakibul Anwar
sustainable growth of real output, high employment, and price stability.
In developed economies, monetary policy is usually cramped two activities in one policy
Lecturer
Faculty of Business Administration
instrument (typically a short-term interest rate), and typically central banks possess a
narrow mandate (normally a principal or special objective of price stability).
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In
developing economies, central banks possess a tendency to use more than one policy
instrument and commonly follow several objectives.
To impact the supply and demand for commodities, services and labor, central banks use
Submitted
monetary policy. There are four key legal documents through which monetary policy is
implemented, which are as follows- credit, interest rates, exchange rates, and wealth.
Nurus Saima
With the right adjustment in monetary policy, a central bank controls the banks' capacity
of lending money, the foreign exchange rate, assetndvalues, and especially supply of money
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of credit used by households, businesses, and the government.
Faculty of Business Administration
in an economy. When a central bank controls the lending capacity of banks, they actually
manipulate the amount
Any changes in the money supply also influence the value of money, for example, interest
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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.
The way in which monetary policy affects employment varies significantly from country
to country. Unfortunately in many developing nations there have been few studies
conducted by central banks exploring the relationship between monetary policy and
employment. In the face of doubt about the nature of the connection between monetary
policy and employment, it is usually accepted that monetary
rd policy has an important
Date of Submission: 23
influence on local economic activity and employment.

1
May, 2016
Commonly speaking, central banks in developing economies fall into two broad types.
They 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.
Stability fixated central banks aim to uphold price and financial stability. This makes an
secondary contribution to employment, in that it is more conducive to job creation than an
environment of unstable prices and financial conditions. Central banks with a growth or
employment objective 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. This can differ from the approach of a stabilityfocused 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.
There is no definitive answer as to whether an exclusive central-bank focus on stability or
a broader mandate is better for job creation and development. Each approach has both
benefits and drawbacks (this is discussed in greater detail below). In Latin 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 Brazil and Chile after central banks adopted inflation targets). In Asia,
there are examples of rapid development over the past two decades assisted by central
banks pursuing a range of objectives (e.g. China and India).
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COXS BAZAR INTERNATIONAL UNIVERSITY

Monetary Policy of Bangladesh

FUNCTIONS & IMPORTANCE OF MONETARY POLICY

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

sustainable growth of real output, high employment, and price stability.

Coxs Bazar International University

Coxs Bazar International University

influence on local economic activity and employment.

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