Monetary Policy PDF

Welcome 1  Introduction Profile of the Course Teacher: Md. Tamim Hasan Lecturer Department of Business Administration Northern University Bangladesh. 2 Introduction Monetary Policy & Fiscal Policy...

Welcome 1  Introduction Profile of the Course Teacher: Md. Tamim Hasan Lecturer Department of Business Administration Northern University Bangladesh. 2 Introduction Monetary Policy & Fiscal Policy 3  Sub-topics 1. Monetary policy 2. Different types of Monetary policy 3. Monetary Policy Instruments are used by the Central Bank. 4. Fiscal Policy 5. Different types of Fiscal Policy 6. Similarities and differences between Fiscal and Monetary Policy 7. Budget deficit and surplus 8. Government debt and deficits: Are they the same thing? 9. Recession 4 Monetary Policy 5  Monetary Policy Monetary policy is a set of actions to control a nation's overall money supply and achieve economic growth.  Monetary policy strategies include revising interest rates and changing bank reserve requirements.  Bangladesh Bank (BB)'s Monetary Policy Statements (MPS) outline the monetary policy stance, designed to support government's policies and programs in pursuit of faster inclusive economic growth and poverty reduction; while also maintaining price stability. 6  Monetary Policy Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy.  It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment. 7  Monetary Policy These policies are implemented through different tools, including the adjustment of the interest rates, purchase or sale of government securities, and changing the amount of cash circulating in the economy.  The central bank or a similar regulatory organization is responsible for formulating these policies. 8 Objectives of Monetary Policy T 9  Objectives of Monetary Policy  The primary objectives of monetary policies are the management of inflation or unemployment and maintenance of currency exchange rates. 1. Inflation Monetary policies can target inflation levels. A low level of inflation is considered to be healthy for the economy. If inflation is high, a contractionary policy can address this issue. 10  Objectives of Monetary Policy 2. Unemployment Monetary policies can influence the level of unemployment in the economy. For example, an expansionary monetary policy generally decreases unemployment because the higher money supply stimulates business activities that lead to the expansion of the job market. 3. Currency exchange rates Using its fiscal authority, a central bank can regulate the exchange rates between domestic and foreign currencies. For example, the central bank may increase the money supply by issuing more currency. In such a case, the domestic currency becomes cheaper relative to its foreign counterparts. 11  Types of Monetary Policy In the literature review, there are two types of monetary policy, namely expansionary monetary policy and contractionary monetary policy. 1. Expansionary monetary policy refers to monetary policy aimed at encouraging economic activity, which includes increasing the money supply. 2. In contrast, contractionary monetary policy refers to monetary policy aimed at slowing down economic activity, which includes reducing the money supply. 12  Types of Monetary Policy  During times of slowdown or a recession, an expansionary policy grows economic activity. By lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.  A contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation, where the prices of goods and services in an economy rise and reduce the purchasing power of money. 13  Monetary Policy Instruments are used by the Central Bank Monetary policy is the policy through which the central bank of any country controls the economy of the country. When the cash demand of a country is estimated, the central bank issues paper money. This circulation of paper money needs to be managed and kept stable, and that is where monetary policies come into play.  This is done because money is a medium of exchange when related to the supply of goods. Thus, the central bank uses various instruments to maintain and contribute to the economic growth of the country. 14  Monetary Policy Instruments are used by the Central Bank Instruments of Monetary Policy There are various instruments used by the central bank to keep a check on the economy of the country. A few of them are as follows:  Reserve Requirement  Open Market Operations  Interest Rate  Selective Credit Control. 15 Fiscal Policy 16  Fiscal Policy Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions. These include aggregate demand for goods and services, employment, inflation, and economic growth. Fiscal policy is often contrasted with monetary policy, which is enacted by central bankers and not elected government officials. 17  Fiscal Policy 1. During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity. 2. Conversely, to combat inflation, it may raise rates or cut spending to cool down the economy.  In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. 18  Fiscal Policy  Example of Fiscal Policy Sometimes the government decreases the taxes and increases the spending for a sudden boost in the economy if required. For that, spending on infrastructure projects increases to create better job opportunities, income, and other social programs. 19  Objectives of Fiscal Policy The main objectives of the fiscal policy are:  Fiscal policy maintains the growth rate of the economy.  It also helps in maintaining the price levels.  It encourages the economic development of the country.  It maintains the state of equilibrium in the balance of payments. 20  Types of Fiscal Policy There are two main types of fiscal policy: expansionary and contractionary. 1. Expansionary fiscal policy Expansionary fiscal policy, designed to stimulate the economy, is most often used during a recession, times of high unemployment or other low periods of the business cycle. It entails the government spending more money, lowering taxes or both. The goal of expansionary fiscal policy is to put more money in the hands of consumers so they spend more to stimulate the economy. Explained in economic language, the goal of expansionary fiscal policy is to bolster aggregate demand in cases when private demand has decreased. 21  Types of Fiscal Policy 2. Contractionary fiscal policy Contractionary fiscal policy is used to slow economic growth, such as when inflation is growing too rapidly. The opposite of expansionary fiscal policy, contractionary fiscal policy raises taxes to cut spending. As consumers pay more taxes, they have less money to spend, and economic stimulation and growth slow. Under contractionary fiscal policies, the economy usually grows by no more than 3% per year. Above this growth rate, negative economic consequences – such as inflation, asset bubbles, increased unemployment and even recessions – may occur. 22  Fiscal policy vs. monetary policy The United States relies on two types of policies to shape the economy: fiscal and monetary. Fiscal policy is used to influence the aggregate demand in a country, whereas monetary policy is used to control the amount of money available throughout the economy. The government may implement fiscal policy to shape the number of products and services that people can or will demand, whereas the central banks’ monetary policy affects our ability to demand these services. 23  Fiscal policy vs. Monetary policy 1. The central banks – like Bangladesh Bank– set monetary policy, whereas the government legislative and executive branches set fiscal policy (state and local legislative and executive branches set state and local fiscal policy). 2. The Bangladesh Bank may take monetary policy action to achieve price stability, full employment and stable economic growth, whereas Government of Bangladesh determine tax rates for corporations and individuals to work toward fiscal policy goals. 24  Fiscal policy vs. monetary policy 3. Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy.  By contrast, fiscal policy refers to the government’s decisions about taxation and spending. 25  Similarities between Fiscal and Monetary Policy Both monetary and fiscal policies are used to regulate economic activity over time. They can be used to accelerate growth when an economy starts to slow or to moderate growth and activity when an economy starts to overheat. In addition, fiscal policy can be used to redistribute income and wealth.  The overarching goal of both monetary and fiscal policy is normally the creation of an economic environment where growth is stable and positive and inflation is stable and low. 26  Similarities between Fiscal and Monetary Policy Crucially, the aim is therefore to steer the underlying economy so that it does not experience economic booms that may be followed by extended periods of low or negative growth and high levels of unemployment.  In such a stable economic environment, householders can feel secure in their consumption and saving decisions, while corporations can concentrate on their investment decisions, on making their regular coupon payments to their bond holders and on making profits for their shareholders. 27  Budget A budget refers to an estimation of revenue and expenses that's made for a specified future period of time. Budgeting usually occurs on an ongoing basis, with individual budgets being re- evaluated regularly. A budget is a spending plan based on income and expenses. In other words, it’s an estimate of how much money you’ll make and spend over a certain period of time, such as a month or year. 28  Budget Budgets can be outlined for a person, a family, a group of people, an entity, a country, a multinational organisation, a government, or just anything else that makes and spends money.  Budget is classified into the following three parts: 1. Balanced budget 2. Surplus budget 3. Deficit budget 29  Features of Budget 1. CONTROL An analysis of the above definition reveals the following as features of the budget. A Budget must be expressed either in quantitative form 2. It must be prepared before the time for which it is required, for example, if budget is required for the year 2013-14, it must be prepared in the year 2012-13. 3. Budget must be prepared for a definite period. 4. Budget must be prepared in accordance with the policies of the business enterprise. 5. Budgets are prepared normally for attaining organisational objectives, because policies are formulated to achieve the objectives and those are translated into quantitative and financial form. 30  Budget deficit and surplus 1. A balanced budget is a condition in financial planning or the budgeting procedure where the total revenues are equivalent to or greater than the total expenditure.  A budget can be considered as balanced in experience after a complete year’s account of revenues and expenses have been recorded. A company’s budget for the upcoming year can be called balanced based on anticipations or approximate values. 31  Budget deficit and surplus 2. The fiscal balance is the difference between government revenues and spending. A fiscal deficit occurs when, in a given year, a government spends more than it receives in revenues. On the other hand, a government will run a surplus when revenues exceed expenditures. 3. A budget surplus is when a government, business or individual brings in more money than is spent in a given period. It's the opposite of a budget deficit, which is when an entity spends more than it collects. 32  Budget deficit and surplus  What is a Surplus Budget? A surplus budget is a condition when incomes or receipts overreach costs or outlays (expenditures). A surplus budget normally refers to the financial conditions of the governments. However, individuals choose to use the term ‘savings’ rather than ‘budget surplus.’ Surplus is a manifestation that the government is being effectively operated and regulated.  What is a Deficit Budget? A deficit budget is said to have occurred when expenses exceeds the revenue and it is a symptom of financial health. The government normally uses this term to its spending instead of entities or individuals. Accrued government deficits form the national debt. 33  Government debt and deficits What is the difference between the deficit and government debt? The deficit is the difference between government revenue and spending, usually measured over a single financial year. Debt is the total amount owed by the Government which has accumulated over the years. Debt is therefore a much larger sum of money. At the end of 2023/24 public sector net debt was £2,690 billion (i.e. £2.6 trillion), or 98% of GDP. This is equivalent to around £37,900 per person in the UK. 34  Government debt and deficits Total Public debt stock in Bangladesh was US$ 155.71 billion1 at the end of FY22. The domestic and external debt stock constitute 60.73 per cent and 39.27 per cent, respectively, of the total public debt. If publicly guaranteed debt is taken into consideration, PPG stood at US$ 162.13 billion. 35  Government debt and deficits The relation between government deficit and government debt can be explained through the following points. 1. Government deficit is the excess of total expenditure over total receipt of the government; whereas, government debt is the amount of liability, owed by the government to the public, foreign and other institutions. 2. The term government deficit implies increase in the debt of the government. In other words, if the government continues to borrow to finance deficit, it leads to additional debt. 36  What is a Recession? A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth indicate a recession. However, more complex formulas are also used to determine recessions. It is a sustained period when economic output falls and unemployment rises. 37  What is a Recession? A recession is a significant decline in economic activity that lasts for months or even years. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.  Recessions are considered an unavoidable part of the business cycle—or the regular cadence of expansion and contraction that occurs in a nation’s economy. 38 Thank You 39