Government Economic Policies: What Is Monetary Policy?

Government Economic Policies
• Governments usually formulates a lot of policies on a

lot of issues.
• But, if we concentrate only on the policies to
regulate and guide the economic activities of the
country, we find only two-
» Monetary Policy and
» Fiscal Policy
What is Monetary Policy?

It is the government’s decision about how much
money to supply to the economy.
1
Monetary Policy
Can be- Loose or Tight
• If the Bangladesh Bank (BB) implements a loose monetary
policy (often called expansionary) , the supply of credit
increases and its cost falls.
• A loose monetary policy is often implemented as an attempt
to encourage economic growth.
• If the BB allows a tight monetary policy (often called
contractionary), the supply of credit decreases and its cost
increases.
• Why would any nation want a tight money policy?
– In order to control inflation
2
The Two Faces of Monetary Policy
3
Goals of Monetary Policy
• Price stability
• GDP growth
• Investment
• Fight recession
• Exchange rate stabilization
• Desired level of unemployment rate
4
How these goals are achieved by controlling
money supply?
• Price Stability: for example, price is shooting
up and we want to control it…
We Now So, Demand Producers

reduce people people for reduce
money have buy goods price to
supply less less falls maintain
money amount sales
at hand of
goods
5
Example: Money Supply vs. Inflation
6
How these goals are achieved by
controlling money supply?
 Investment can be induced by

controlling money supply
7
• GDP growth: for example, we want to increase
GDP growth…
We Now So, Demand Producers

increase people people for produce
money have buy goods more
supply more more rise goods to
money amount match
at hand of market
goods demand
8
• For example: our export is reducing and we
want to increase it…
We As a So, Cost of Export

increase result investment
banks falls and rises
money banks
supply have
reduce goods
interest become
more
cheaper
idle rate
money
9
Channels through which monetary policy
works
• Interest Rate channel

• Exchange rate channel
• Credit channel
10
How is the money supply controlled
• The Central Bank generally uses three tools

» Open market operation (OMO)
» Discount rate (DR)
» Reserve ratio (RR)
11
Open Market Operation (OMO)
• Defined as the buying or selling of treasury bills and
bonds by the Bangladesh Bank in the open market.
• Expansionary – Bangladesh Bank buys bonds (injects
money)
• Contractionary – Bangladesh Bank sells bonds (pulls out
money)
Characteristics of OMO
• Sometimes done for temporary periods
– Repurchase Agreement -- BB buys bond with
agreement to sell it back.
– Matched-Sale Purchase -- BB sells bond with
agreement to buy it back.
12
Discount Rate
• Defined as the rate of interest charged to banks that borrow
from the BB.
• Expansionary -- BB lowers discount rate.
• Contractionary -- BB raises discount rate.
Characteristics of DR
• Done at the discretion of the commercial banks
• Affects interest rate structure of the commercial and
specialized banks
• DR may influence economic activity
13
Reserve Ratio (RR)
• Banks are required to maintain a certain percentage of their
deposits in the form of reserves or balances with the BB. This
percentage is called the Reserve Ratio.
• Expansionary Policy -- BB lowers reserve ratios.
• Contractionary Policy -- BB raises reserve ratios.
Characteristics of RR
• Too blunt -- needs tiny changes for reasonable adjustments in
money growth.
• Too Disruptive -- affects all banks balance sheets.
14
WORLD BANK
• The world bank is an internationally supported bank that
provides financial and technical assistance to developing
countries for development programs (e.g. bridges, roads,
schools)with the stated goal of reducing poverty.
• The world bank is one of the two Bretton Woods Institutions which were
created in 1944 to rebuild a war torn Europe after World War II
• Membership :- 185 countries
• Headquarters :- Washington
World bank group consists of five closely associated institutions:
International Bank of Reconstruction and development (IBRD)

International Development Association(IDA)
International Finance Corporation(IFC)
Multilateral Investment Guarantee Agency(MIGA)
International Centre for Settlement of Investment Disputes(ICSID)
World bank is basically consist of two of these IBRD & IDA

World Bank
Functions/Key Roles of World Bank:
• Granting reconstruction & development loans

• Providing loans to governments & private concerns
• Promoting foreign investment
• Providing technical, economic and monetary advice
• Encouraging industrial development
International Monetary Fund(IMF)
• IMF is the intergovernmental organization that oversees the global
financial system by following the macroeconomic policies of its member
countries, in particular those with an impact on exchange rate and the
balance of payments.
• The IMF was created to support orderly international currency exchanges
and to help nations having balance of payment problems through short term
loans of cash.
• Its headquarters are in Washington, United States.
HISTORY
• The International Monetary Fund was conceived in July 1944 originally
with 45 members and came into existence in December 1945 when 29
countries signed the agreement.
• IMF started to make service with IBRD in 1947.
• The IMF works to improve the economies of its member countries.
• The conference culminated in the creation of the famous “twins”-IMF &
World bank.
IMF
Objectives:
 To provide the global public good of financial stability
 Facilitate the growth of international trade, thus promoting job creation,
economic growth, and poverty reduction
 Promote exchange rate stability and an open system of international
payments
 Lend countries foreign exchange when needed, on a temporary basis
and under adequate safeguards, to help them address balance of
payments problem
Roles:
– Tracks global economic trends and performance
– Alerts its member countries
– Provides a forum for policy dialogue
– Provides policy advice and financing to members
Difference Between IMF & World Bank
The International Monetary Fund World Bank
Oversees the international monetary system Seeks to promote the economic development of the
world's poorer countries
Promotes exchange stability and orderly exchange Assists developing countries through long-term
relations among its member countries financing of development projects and programs
Assists all members--both industrial and developing Provides to the poorest developing countries whose per
countries--that find themselves in temporary balance capita GNP is less than $865 a year special financial
of payments difficulties by providing short- to medium- assistance through the international development
term credits association (IDA)
Draws its financial resources principally from the quota Acquires most of its financial resources by borrowing on
subscriptions of its member countries the international bond market
Has at its disposal fully paid-in quotas now totaling SDR Has an authorized capital of $184 billion, of which
145 billion (about $215 billion) members pay in about 10 percent
Has a staff of 2,300 drawn from 182 member countries Has a staff of 7,000 drawn from 180 member countries
Asian Development Bank (ADB)
• The Asian Development Bank (ADB) is a regional
development bank established on 22 August 1966 to
facilitate economic development of countries in Asia.
• From 31 members at its establishment, ADB now has
67 members - of which 48 are from within Asia and the
Pacific and 19 outside.
• By the end of 2012, both the United
States and Japan hold the two largest proportions of
shares each at 12.78%. China holds 5.45%, India holds
5.36%.
Functions of ADB
• Promote investment in the region of public and private
capital for development purposes.
• Provide loans for the economic and social development of
the member countries of the region.
• Help member countries in coordinating their development
policies and plans.
• Provide technical assistance for the preparation, financing
and execution of development projects and programmes.
• Provide financial and technical assistance to member
countries for environmental protection.
• Act as financial intermediary by transferring resources from
global capital markets to developing countries.
• Support public resource mobilization and management to
member countries.
Word Trade Organization(WTO)
• The WTO is an organization that deals with
rules of trade between nations
• Functions include acting as:
– An organization for liberalizing trade
– A forum for trade negotiations
– A set of rules
– A system to settle disputes
An Organization for Liberalizing Trade
• Liberalism in economics refers to an ideology that
supports the individual rights of property and free
contract
– In the context of the WTO it means the removal of trade
barriers
• Goes with the idea that the hands-off approach to markets is the most
efficient in the long-run
• WTO’s Stated Aim:
– Promote Free Trade
– Stimulate Economic Growth
A Forum for Trade Negotiations
• A place where member governments go to try to sort
out trade problems
– Members start by talking it out
– WTO acts as a mediating body
A System to Settle Disputes

• Conflict of interests exists in trade relations
– Trade agreements need interpreting
• WTO is meant to be a neutral party to help settle
trade disputes
The WTO as a Set of Rules
• WTO Agreements
– Signed by most of the world’s trading nations
– The legal framework for international commerce
– Contracts for governments to maintain certain trading policies
• Purpose is to help exporters and importers, while
making sure governments meet social objectives
• The WTO oversees the implementation, administration
and operation of the covered agreements
History
• After World War II many nations had adopted

a protectionist stance on trade
• Many felt closed-protectionist positions was a
cause of WWII
• Victor nations set up economic institutions to
prevent this from happening again

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Government Economic Policies

• Governments usually formulates a lot of policies on a

What is Monetary Policy?

We Now So, Demand Producers

 Investment can be induced by

We Now So, Demand Producers

We As a So, Cost of Export

• Interest Rate channel

• The Central Bank generally uses three tools

World bank group consists of five closely associated institutions:

International Bank of Reconstruction and development (IBRD)

World bank is basically consist of two of these IBRD & IDA

Functions/Key Roles of World Bank:

• Granting reconstruction & development loans

A System to Settle Disputes

• After World War II many nations had adopted

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