Regulation of Consumer Credit: If there is excess demand for certain consumer durable leading to their high prices, central bank can reduce consumer credit by increasing down payment, and reducing the number of instalments of repayment of such credit.
Moral Suasion: • Moral Suasion means persuasion and request. To address inflationary situation central bank persuades and request the commercial banks to refrain from giving loans for speculative and non-essential purposes. Direct Action: • Under the banking Regulation Act, the Central Bank has the authority to take strict action against any of the commercial bank that refuses to obey the directions given by State Bank of Pakistan.
SIGNIFICANCE OF MONETARY POLICY • Control Inflation or Deflation • Availability of the Supply of money and Credit • Integrated Interest Rate Structure • Effective Central Banking • Long-Term Loans for Industrial Development • Creation of Financial Institutions
Control Inflation or Deflation: Monetary policy is the policy used by the government of a country to control inflation or deflation in an economy, and this policies been implemented by the central bank through the ministry of finance. Availability of the Supply of money and Credit : Monetary policy is concerned with the charges in the supply of the money and credit. It refers to the policy measures under taken by the government or central bank to influence the availability, cost and use of money and credit with the help of monetary techniques to achieve specific objectives.
Integrated Interest Rate Structure: In an underdeveloped economy, there is absence of an integrated interest rate structure. There is wide disparity of interest rates prevailing in the different sectors of the economy and these rates do not respond to the changes in the bank rate, thus making the monetary policy ineffective. Effective Central Banking: To meet the developmental needs the central bank of an underdeveloped country must function effectively to control and regulate the volume of credit through various monetary instruments, like bank rate, open market operations, cash-reserve ratio etc.
Long-Term Loans for Industrial Development: Monetary policy can promote industrial development in the underdevelopment countries by promoting facilities of medium-term and long-term loan to the manufacturing units. Creation of Financial Institutions: The Monetary policy in a developing economy must aim to improve its currency and credit system. More banks and financial institutions should be set up, particularly in both areas which lack these facilities
Constraints for Individual Investors Lack of Expertise to Understand & Forecast Market Lack of time for in-depth Analysis Lengthy procedure for documentations Inability to accurately monitor the changing market Inability for diversification of investments
Interest Rates Amount paid by a borrower for the use of Money.
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- Spring '20
- Monetary Policy