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Monetary Policy

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Monetary Policy
The Objective and Formulation of Monetary Policy in Malaysia
Anas Faizal Aning & Rubin Sivabalan Monetary Assessment & Strategy Department 6 July 2010 Auditorium, Bank Negara Malaysia 2.30-4.30pm

DISCLAIMER: Views expressed in this presentation are those of the author and do not necessarily represent those of BNM nor are they necessarily 1 Presentation to TAR College, July2010 endorsed by BNM.

Presentation outline
Monetary Policy and Macroeconomic objectives
The importance of price stability

The role of monetary policy Monetary policy framework in Malaysia

Presentation to TAR College, July2010

2

What is the objective of policymakers?

“The ultimate objective of all public policies is to improve the living standards (welfare) of its nation”

Presentation to TAR College, July2010

3

What is the objective of policymakers?
To improve the standard of living, one of the public policy objectives is to promote robust and sustainable economic growth

GDP (or GNI) is a crude proxy for measuring the standard of living, i.e.

Y = C + I + G + (X-M)

Presentation to TAR College, July2010

4

What is macroeconomic stability?
INTERNAL Balance
Inflation is low and predictable Fiscal policy is stable and sustainable

EXTERNAL Balance
BOP situation is perceived as viable Real ER is competitive and predictable

Stanley Fischer (1993)

Presentation to TAR College, July2010

5

How does price stability contribute to sustainable growth?

Facilitates decision-making

Promote efficient allocation of resources Price stability Reduces distortionary effects on the tax system Prices remain an effective signal for demand & supply Better conditions for growth

Reduces the cost of hedging

Presentation to TAR College, July2010

6

Other costs of Inflation : What you inevitably face when prices increase
The erosion of value of money & living standards Redistribute income from savers to borrowers if real interest rate is negative
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