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iv)To investigate the challenges that create varies to the path of implementation of
monetary policy in Bangladesh.
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Chapter-2
A Theoretical Picture
Of
Monetary Policy
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A currency board is a monetary arrangement that pegs the monetary base of one country
to another, the anchor nation. As such, it essentially operates as a hard fixed exchange
rate, whereby local currency in circulation is backed by foreign currency from the anchor
nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of
foreign currency must be held in reserves with the currency board. This limits the
possibility for the local monetary authority to inflate or pursue other objectives.
f) Unconventional monetary policy at the zero bound
Other forms of monetary policy, particularly used when interest rates are at or near 0%
and there are concerns about deflation or deflation is occurring, are referred to as
unconventional monetary policy. These include credit easing, quantitative easing, and
signaling. (Monetary Policy". Federal Reserve Board. January 3, 2006.)
Minister of Commerce
Governor of BB
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This council headed by Minister of Finance with Minister of commerce, Governor of
Bangladesh Bank, Security of Finance divisions, Secretary of internal resource division,
Member of Planning commission as the members has been set up to oversee the
Bangladesh Banks Monetary Policies. (General Banking by L.R. Chowdhury)
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Data
Assessment of economic
MPC Meeting
weeks
Every
six
MPC
decision:
Raise/Maintain/Lower policy
rate
Press Release
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Chapter-3
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Bangladesh Bank took majors to monitor credit and monetary expansion keeping in view
the price situation and international reserve position. Efforts were made to achieve
the targeted growth of domestic credit and thereby, the money supply, through
imposing ceiling on credit to the government, public and private sector. The major
policy instrument available to Bangladesh Bank and provide liberal refinance
facility at confessional rate for priority lending. According to the national
economic policy, the Banks were to provide the desired volume of credit t and
administered and low rate of interest. In that situation, Bangladesh Bank
practically did not have any effective instrument for making adjustment in the
growth of money supply or for transmitting market signals into changes in money
supply. The monetary policy therefore, could not function in true sense as a result
the banking system could not play its role as an effective financial intermediary.
(Central Banking in the New Millenium." Ahluwalia,)
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While fiscal policy too is relevant in addressing these goals and thus there is a need
for policy coordination, monetary policy must play its due role. While leading central
banks in the industrial world have increasingly adopted the unitary goal of fighting
inflation, interestingly directive by enumeratingi)The promotion of price stability.
ii) Ensuring full employment.
iii) Supporting global economic and financial stability (so long as the latter maybe
targeted without prejudicing the first two goals) as the chief monetary policy goals.
In broad terms therefore the latter view is consistent with the BB vision as enunciated
above, although anchored along different perspectives.
b) Inflation Target
It is the general wisdom that monetary policy tools are of immediate influence in
controlling inflation. However contemporary evidence amply illustrates that monetary
policy cannot deal well with the inflationary impact of external shocks such as the recent
international price of oil and related energy products. Many central banks as a
consequence focus on the core inflation, which is typically constructed by subtracting the
most volatile components (e.g., food and energy prices, indirect taxes etc) from the
consumer price index (CPI). The Bank of Canada argues
that it is the core concept that better predicts the underlying price stability in the
economy. Hence as a policy goal, core inflation may be a more credible target than CPI
inflation. While there is no standard measure of core inflation in the Bangladesh context
at this time, the construction methodology is made complex by two facts. First is that
food items constitute nearly 60 percent of the CPI index, and while the appropriate
commodity group weights may require a re-think, to ignore food entirely in defining the
core inflation may render the construction a bit like throwing the baby away with the bath
water. Secondly, in the Bangladesh context, the volatility of the international energy
prices appear not to filter down to the CPI since the relevant domestic prices are
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subsidized by the state. Periodic adjustments in administered energy prices have always
lagged the world market changes in both the time line as well as in magnitude often most
dramatically. While it may be useful to focus on the non-food component of the index
(which occupies only 41.6 percent of the full CPI) in order to gauge at the build-up of
underlying inflationary forces in the economy, it would be unwise to treat this alone as a
valid measure of core inflation.
c) Growth target
GDP growth projections of the Medium Term Macroeconomic Framework (MTMF) in
the government's National Strategy for Accelerated Poverty Reduction (NSAPR),
modified appropriately in the light of unfolding actual developments, are used as output
growth targets for the purpose of monetary policies.
(National Policy Forum Dhaka: 20-22 August, 2009 Organized by: Centre for Policy
Dialogue, Prothom Alo, The Daily Star,)
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The methods of credit control can be classified as follows
3.5.1Quantitative Methods
i)Bank rate policy
ii)Open market policy
iii)Variation of reserve ratio
3.5.2Qualitative Methods
i) Rationing of credit
ii) Direct action
iii)Regulation of consumers credit
iv)Moral persuasion
v)Publicity
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level will go down and depression in business and trade will be the outcome. If there is a
decrease in the bank rate the opposite e results of above will be experienced in the
economy.
Effects on foreign trades: An increase in bank rate wills increases other interest rates in
the country. So, investment will be profitable. It will ensure the insertion of foreign
capital into the economy and leakage of domestic capital will be stopped. Moreover,
increased bank rate will decrease the piece level because amount of credit will be reduced
into country. This decreased price level will again encourage expert and discourage
import, which will make balance of payment favorable. Opposite effects of above will be
experienced if the central bank decreases the bank rate in the economy.
Limitations of Bank rate policy
i) Bank rate policy would not be effective if there lacks strong linkage between bank rate
and market/ interest rate especially for a developing country like Bangladesh.
ii) If commercial banks have excessive money; then bank rate may not be effective
because they will lend in lower interest rates though bank rate increases.
iii) Bank may successes during the time of prosperity. Because businessmen become
highly ambitious of their profits in this situation and will borrow money though the
interest rate increases.
iv) Reduction in bank rate may not be successful to increase the amount of credit during
the time of depression. So, bank rate policy has several limitations in its
operation. After that it is the best weapon of central bank to control the amount of credit
in the economy.
b) Open market policy
The method by which the central bank controls the amount of credit by selling and
buying government credit instrument is termed as open market operation. When the
central bank intends to contract credit, it sales the credit instruments in the market. These
instruments are purchased by commercial banks and people also buy them issuing cheque
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to the commercial banks. Thus money goes to the central bank and amount of money for
credit creation reduces which in turn contracts the amount of credit in the economy.
Limitations of open market policy
i) Selling- it reduces amount of cash of commercial banks .but if commercial banks take
loan form central bank it would not be effective to reduce credit.
ii) Buying- it increases the amount of cash in commercial banks. But it may not be able to
expand credit if commercial banks repay loan to the central bank with this increased cash.
iii) Depreciation- During depreciation credit expansion through purchasing credit
instruments is not possible. Because in this period businessmen will not want tomorrow
from commercial bank.
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The methods used to control credit in special sectors for special purposes are called
qualitative\selective methods of credit control. These methods do not deal with the
amount of credit rather change the flow or direction of credit used in different sectors of
economy.
a)Rationing of credit
Rationing of credit means fixing the amount of credit among different sectors of the
economy. By this method central bank can decrease the amount of credit in one sector
and can increase it in other sector. For example, if central bank thinks that there is
excessive investment in garments industry and jute industry suffers form required
investment, then it can order the commercial banks not to disburse credit beyond required
amount in garments industry and divert the excess amount to jute industry.
Limitations
i)Borrowers may use the credit money in other purposes.
ii) It is difficult for central bank to supervise whether the credit money is being used
purposively or not.
iii) Sometimes commercial banks think this type of work as an unwanted intervention by
central bank.
b)Direct action
If it is proved by central bank that credit creation policy of any commercial bank is not
transparent then central bank can take punitive measures against that bank and thus
affects its credit creation. These punitive measures may be of not rediscounting bills of
exchange, discounting bills of exchange at a rate higher than the prevailing rare, etc. As a
result, the commercial bank will compelled to follow sound central bank policy.
c)Regulation of consumers credit
It is a method to control credit in consumable goods, which are purchased in installment
basis. If central bank circulates to increase the amount of down payment or reduce the
number of installment then consumer credit will be contracted in the economy. In an
opposite way consumers credit can be increased. It was followed in USA during Korean
War.
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d)Moral persuasion
To make the banking system sound and efficient, central bank sometimes requests the
commercial banks to increase or decrease credit. As a guardians request, commercial
banks follow it and thus amount of credit is controlled in the economy.
e)Publicity
Sometimes central bank applies publicity as a weapon of credit control. Central bank
publishes weekly, fortnightly or monthly bulletins and annual reports where balance
sheets and other business and economic condition of different commercial banks are
presented well. As a result the commercial banks become more careful in the line of their
credit creation. Thus central bank applies various types of measures to control credit in
the economy. But central bank should apply different types of method simultaneously
rather to use single method to make credit control effective. ( Bangladesh Bank
Working Paper Series: WP 0708, 2007)
Chapter-4
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Challenges, Recommendation
&Conclusion
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the NBFIs is do not come under the purview of a monetary policy and thus nullify the
effect of a monetary policy.
3. Existence of Unorganized Financial Markets
The financial markets help in implementing the monetary policy ,in many developing
countries the financial markets especially the money markets are of an unorganized
nature and in backward conditions ,in many places people like money lenders ,traders
,and business actively take part in money lending ,but unfortunately they dont not under
the purview of a monetary policy and creates hurdle in the success of a monetary policy
4. Higher Liquidity Hinders Monetary Policy
In rapidly growing economy the deposit base of money commercial bank is expanded,
this creates excess liquidity in the system .under this circumstance even if the monetary
policy increase the CRR or SLR, it does not deter commercial banks from credit
creation ,so the existence of excess liquidity due to high deposit base is a hindrance in the
way of successful monetary policy.
5. Money Not Appearing In an Economy
Large percentage of money never comes in the mainstream economy, rich people,
traders ,business and other people prefer to spend rather than to deposit money in the
bank
,this shadow money is used for buying precious metals like gold silver
,ornaments ,and land and in speculation ,this type of lavish spending give rise to inflation
trend in mainstream economy and the monetary policy fails to control it.
6. Time Lag Affects Success of Monetary Policy
The success of the monetary policy depends on timely implementation of it ,however ,in
many cases unnecessary delay is found in implementation of the monetary policy ,or
many times timely directives are not issued by the central bank , then the impact of the
monetary policy is wiped out.
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7. Monetary and Fiscal Policy Lacks Coordination
In order to attain a maximum of the above objectives ,it is unnecessary that both the
fiscal and monetary policies should go hand ,as both these policies are prepared and
implementation by two different authorities ,there is a possibility of non coordination
between these two policies ,this can harm the interest of the overall economic policy
4.2Recommendation
i) In Bangladesh, capital markets should be expanded and organized enough to succeed
the monetary policy.
ii) The credit control mechanisms like open market operation, bank rate, etc. should be
effective.
iii) A narrow bill market should make the discount rate effective.
iv) Banking habits are also underdeveloped which hampers the effectiveness of monetary
policy seriously. So banking habits should be developed.
v) Steps should be taken to abolish the existence of liquidity trap.
vi) To run the monetary policy smoothly and effectively, it is essential to pay sufficient
attentions to increase the GDP.
.
4.3Conclusion
In view of formulating credible monetary policy to attain the achievement of economic
objective, the difficult part for the central banks is to distinguish, within ongoing inflation
evolutions, between short term volatility and the underlying pressure of inflation,. While
it has now become standard practice for most central banks around the world to monitor
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core inflation, no progress has so far been made in the Bangladesh context. The paper
takes a pioneering look in measuring core inflation in Bangladesh focusing on the
popular exclusion and trimmed mean approaches. The performance criteria adopted in
this analysis so that the measure of core inflation developed in the paper has strong
money-induce characteristics and therefore, can credibly be used as a short or medium
term guide of monetary policy in Bangladesh.
Bibliography
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1. http//www.bangladesh-bank.org
2. http//www.mtb.com.bd
3. http://ec.europa.eu/economy_finance/publications
4. www.cpd.org.bd
5. http//www.google.com
6. http//www.wikipedia.com
7. http://www.imf.org
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