MONEATARY POLICY PRESENTATION RELATED.pptx
- 2. TOPIC MONETARY POLICY & MONETARY POLICY RESPONSE IN EMERGING MARKETS
- 4. MONETARY POLICY Monetary policy refers to the actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth. Monetary policy can be broadly classified as either expansionary or contractionary. Tools include open market operations, direct lending to banks, bank reserve requirements, unconventional emergency lending programs, and managing market expectations.
- 5. Goals of Monetary Policy The most important is to manage inflation. The secondary goal is to reduce unemployment, but only after controlling inflation. The third goal is to promote moderate long-term interest
- 6. Types of Monetary policy CONTRACTIONRY POLICY EXPANSIONARY POLICY TYPES
- 7. CONTRACTIONARY POLICY • Central banks use contractionary monetary policy to reduce inflation. They reduce the money supply by restricting the volume of money banks can lend. • The banks charge a higher interest rate, making loans more expensive.
- 8. EXPANSIONARY POLICY • Central banks use expansionary monetary policy to lower unemployment and avoid recession. • They increase liquidity by giving banks more money to lend. Banks lower interest rates, making loans cheaper.
- 10. Tools of Monetary Policy Interest rate adjustment Change reserve requirements Open market operations
- 11. Interest Rate Adjustment • A central bank can influence interest rates by changing the discount rate. The discount rate (base rate) is an interest rate charged by a central bank to banks for short-term loans. • For example, if a central bank increases the discount rate, the cost of borrowing for the banks increases. Subsequently, the banks will increase the interest rate they charge their customers. • Thus, the cost of borrowing in the economy will increase, and the money supply will decrease.
- 12. Change Reserve Requirements • Central banks usually set up the minimum amount of reserves that must be held by a commercial bank. By changing the required amount, the central bank can influence the money supply in the economy. • If monetary authorities increase the required reserve amount, commercial banks find less money available to lend to their clients and thus, money supply decreases. • Commercial banks can’t use the reserves to make loans or fund investments into new businesses.
- 13. Open Market Operations • The central bank can either purchase or sell securities issued by the government to affect the money supply. • For example, central banks can purchase government bonds. As a result, banks will obtain more money to increase the lending and money supply in the economy.
- 14. Monetary Policy Pros and Cons PONS Interest Rate Targeting Controls Inflation Can Be Implemented Fairly Easily Central Banks Are Independent and Politically Neutral Weakening the Currency Can Boost Exports CONS Monetary Tools Are General and Affect an Entire Country Effects Have a Time Lag Technical Limitations The Risk of Hyperinflation
- 16. Revolution in Emerging-Market Monetary Policy Although emerging markets are no less at the mercy of advanced economies today than they were in the past, they are benefiting from massive spillover effects in the context of the current crisis. As a result, the ultra-expansionary monetary policies pioneered in advanced economies are now available to almost everyone.
- 17. Two factors were at play. 1. First, the cyclical position of EMEs gave more room for easing of monetary policy, while structural changes improved the anchoring of inflation expectations and kept a lid on exchange rate pass-through. 2. Second, the swift monetary policy easing by the Federal Reserve and other advanced economy central banks calmed global financial conditions. These policies capped the appreciation pressures on the US dollar, an EME risk factor, and gave EMEs greater room to cut interest rates.
- 18. Case Studies Suggest : That a monetary policy strategy will not be successful in maintaining low inflation over the medium term in emerging market countries unless government policies create the right institutional environment.
- 20. MONETARY POLICY RESPONSE IN EMERGING MARKETS • During the Covid-19-induced financial stress in March 2020, central banks in emerging market economies (EMEs) departed from their monetary policy playbook by cutting rates even in the face of sharp currency depreciations and massive capital outflows. • Monetary easing and asset purchases helped cushion the impact of portfolio outflows on local currency sovereign bond markets. • Synchronized monetary and fiscal policies supported one another.
- 21. • The Covid-19 shock has been singular in all respects. Its sheer magnitude was reflected in the • unprecedented capital outflows during March and April. As it hit all economies alike, EMEs could cut rates aggressively to buffer the economic shock without concerns about interest rate differentials with their peers.
- 22. Article
- 23. Thank You!