Impact of Monetary Policy on Gross Domestic Product (Gdp)

Topics: Inflation, Monetary policy, Central bank Pages: 25 (6134 words) Published: March 2, 2013

PhD Scholar & Lecturer, Iqra University, Business Administration Department, Karachi. &
Lecturer, PAF-KIET, College of Management Sciences, Karachi. ABSTRACT
This research article focuses on the impact of Monetary Policy on GDP. GDP no doubt is affected by the Monetary Policy of the state. The research papers of various authors have been studied in this regard to prove the Hypothesis and after in depth analysis by applying Regression Analysis technique it has been observed that the relationship between the two exists. The data of past 30 years of Pakistan has been used for driving the conclusion. The study proved that the interest rate has minor relationship with GDP but the Growth in Money Supply greatly affects the GDP of an economy, obviously various unknown factors also affects the GDP. Growth in Money Supply has a huge impact on GDP. The Research study can further be used for developmental projects for the Growth of Economy, Quality improvements, Household production, the underground economy, Health and life expectancy, the environment, Political immunity and ethnic justice. KEY WORDS: MONETARY POLICY, GROSS DOMESTIC PRODUCT, INFLATION, MONEY SUPPLY.

Monetary policy can be defined as the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply Title: IMPACT OF MONETARY POLICY ON GROSS DOMESTIC PRODUCT (GDP)

COPY RIGHT © 2011 Institute of Interdisciplinary Business Research

Pages: 1348-1361


of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.
Monetary policy in a country acts as a tool by which the government or central bank, attain a set of objectives oriented towards the growth and stability of the economy. Ina case of Pakistan, Monetary policy management and financial sector stability are two primary roles of State Bank of Pakistan (SBP). Monetary policy and process of its formulation in Pakistan has undergone changes with the evolving economic dynamics within the country and the improved empirical and theoretical understanding of the monetary policy across the world. One of the important and crucial intermediate target variables of monetary Policy in Pakistan is money supply. The SBP has been using M2 aggregate (i.e., currency + demand deposits + time deposits) for policy purposes on the assumption that the demand for M2 function is stable in Pakistan. Utilizing the estimated money demand function the target rate of growth of M2 is set (Qayyum, 2002).

Monetary policy of Pakistan now for some years has been largely supportive of the dual objective of promoting economic growth and price stability. It achieves this goal by targeting monetary aggregates (broad money supply growth as an intermediate target and reserve money as an operational target) in accordance with real GDP growth and inflation targets set by the Government (Shamshad, 2006).

State Bank of Pakistan (SBP) shifted its reliance from an administered monetary policy regime governed by ad hoc changes in reserve ratio’s, directed credit and regulated interest rate policies in mid 1990s to a liberal and market oriented monetary policy management (Shamshad, 2007). Broad money supply growth has to be consistent with the targets of growth in real GDP and inflation rate. However, if there are excessive demand pressures either because...
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