Q. What is Monetary policy? Explain the general objectives of monetary policy.
Monetary policy is a part overall economic policy of a country. It is employed by the government as an effective tool to promote economic stability and achieve certain predetermined objectives. Meaning and Definition:
Monetary Policy deals with the total money supply and its management in an economy. It is essentially a programme of action undertaken by the monetary authorities generally the central bank to control and regulate the supply of money with the public and the flow of credit with a view to achieving economic stability and certain predetermined macroeconomic goals. Monetary policy can be explained in two different ways
In a narrow sense, it is concerned with administering and controlling a country’s money supply including currency notes and coins, credit money, level of interest rates and managing the exchange rates. In a broader sense, monetary policy deals with all those monetary and non-monetary measures and decisions that affect the total money supply and its circulation in an economy. It also includes several non-monetary measures like wages and price control, income policy, budgetary operations taken by the government which indirectly influence the monetary situations in an economy.
General Objectives of Monetary Policy
1. Neutral money policy:
Prof. Wicksteed, Hayak, Robertson and others have advocated this policy. This objective was in vogue during the days of gold standard. According to this policy, money is only a technical devise having no other role to play. It should be a passive factor having only one function, namely to facilitate exchange. It should not inject any disturbances. It should be neutral in its effects on prices, income, output, and employment. They considered that changes in total money supply are the root cause for all kinds of economic fluctuations and as such if money supply is stabilized and money becomes neutral, the price level will vary inversely with the productive power of the economy. If productivity increases, cost per unit of output declines and prices fall and vice-versa. According to this policy, money supply is not rigidly fixed. It will change whenever there are changes in productivity, population, improvements in technology etc to neutralize fundamental changes in the economy. Under these conditions, increase or decrease in money supply is allowed to result in either fall or raise in general price level. In a dynamic economy, this policy cannot be continued and it is highly impracticable in the present day economy. 2. Price stability:
With the suspension of the gold standard, maintenance of domestic price level has become an important aim of monetary policy all over the world. The bitter experience of 1920’s and 1930’s has made all most all economies to go for price stability. Both inflation and deflation are dangerous and detrimental to smooth economic growth. They distort and disturb the working of the economic system and create chaos. Both of them are bad as they bring unnecessary loss to some groups where as undue advantage to some others. They have potential power to create economic inequality, political upheavals and social unrest in any economy. In view of this, price stability is considered as one of the main objectives of monetary policy in recent years. It is to be remembered that price stability does not mean that prices of all commodities are kept constant or fixed over a period of time. It refers to the absence of sharp variations or fluctuations in the average price level in the country. A hundred percent price stability is neither possible nor desirable in any economy. It simply implies relative price stability. A policy of price stability checks cyclical fluctuations and smoothen production and distribution, keeps the value of...