INFLATION, DEFLATION AND MONETARY POLICY

Definition of Inflation: Inflation in ordinary language means a process of rising prices. According to G. Acley. "a persistent and appreciable rise in the general level of arrange prices" . According to - Crowther, "Inflation is a estate in which price of money is falling ". In the eynsian sense, true inflation begins when the elasticity of supply of output in response to increase in money supply has fallen to !ero. Classification of inflation : (1) Demand !ll inflation" An increase in effective demand unmatched by total supply available at the current prices will e"ert its influence in raising prices. #his is technically termed as $%emand-pull inflation&. Ca!ses of demand# !ll inflation" '. Increase in money supply( ). Increase in disposable income of the community( *. Increase in community&s aggregate spending on consumption and investment goods( +. Increase in salaries, wages and dearness allowances( ,. Increase in population -. %eficit financing .. /ar financing $o% to cont&ol Demand# !ll inflation " 0i1 '( dec&easin) )o*t+ e, endit!&e: Govt. itself is big buyer or creator of demand . 2o, reduction in govt. e"penditure obviously reduces the demand for goods in the mar3et and help controlling inflation. 0ii1 0iii1 '( inc&easin) ta, : Increase of ta"es will reduce the disposable income in the hands of the public. As a result demand for goods will be reduced. '( inc&esin) t-e &ate of inte&est" If the rate of interest is increased then people in general will be encouraged to save more in the form of ban3 deposit and various deposit schemes. Increase in savings will reduce the consumption e"penditure of the people.

4n the other hand, higher rate of interest will be discouraging factor for the borrowers which in turn will reduce the demand for money and thereby improve the inflationary situation. 0iv1 '( ens!&in) Ade.!ate /! be controlled. 0v1 0vi1 Po !lation cont&ol: %emand-pull inflation could also be controlled partly by controling the growth of population. C-an)in) cons!m tion atte&n: %emand for particular goods and services could be reduced by changing the consumption habits of the people. 6or e"ample demand for rice could be reduced by encouraging people to consume potato in lue of rice. l( " If ade5uate supply of commodities could be ensured either by increasing production or import then demand-pull supply could

Cost !s- inflation :

A rise in the price level may be initiated by growing factor costs. #his is technically called Cost-push inflation. 7a8or types : a1 wage push i1 ii1 iii1 iv1 v1 vi1 vii1 viii1 0i1 0ii1 b1 profit push c1 Cost push or supply shoc3 Ca!ses of Cost P!s- inflation" Increase in cost: Increase in cost of raw materials and other direct e"penses. %eficiency in capital e5uipment 2carcity of complementary factors of production: li3e s3illed labor or technicians, essential raw materials or dynamic entrepreneurs. 9"cessive speculation and tendency to hoarding and profiteering on the part of the producers and traders( Increase in e"port of essential commodities %rought, famine or any other natural calamities. :rolonged industrial unrest. %ecrease in import due to war restriction on import. Controlling wages %iscouraging monopoly business

Cont&ol of Cost P!s- Inflation

0iii1 0iv1

%ecreasing Int. interest rate. 7onetary measures.

MONETARY POLICY
%efinition :"7onetary policy includes all monetary decisions and measures irrespective of whether aims are monetary or non monetary and all non monetary decisions and measures that aim at affecting the monetary system." (A) Moneta&( meas!&es 0'1 ;an3 rate policy 0)1 <egal reserve ratio 0*1 4pen mar3et operation. O01ecti*es : 0a1 for influencing value, volume and use of money 0b1pursuing non-monetary economic, social or political aim. (') Non Moneta&( Meas!&es '. control of prices ). Control of wage *. physical control +. budgetary measures ,. e"port derives or import -. income policies etc. EFFECTI2ENE// OF MONETARY POLICY IN INFLATION 7onetary policy is more effective in controlling %. pull inflation than in cost push inflation. /hen %emand pull inflation e"ist 7. policy is less effective if , a1 velocity of money is increased b1 money mar3et is unorgani!ed and unhealthy /hen Cost push inflation e"ist : : ----:aul. 9n!ing.

#he effectiveness of monetary policy is lesser than the situation of %.pull inflation 3oals of Moneta&( Polic( in De*elo ed Co!nt&ies 0'1 6ull employment 0)1 :rice level stability 0*1 2tability in international e"change value. 3oals of Moneta&( Polic( in De*elo in) Co!nt&ies 0'1 Creating employment 0*1 :rice stability 0)1 Increasing productivity 0+1 Achieving growth.

MONEY AND 'AN4IN3 IN DE2ELOPIN3 CO5NTRIE/ 7oney mar3ets in <%Cs : 7oney mar3et of most <%Cs is characteri!ed by "%=A<I27" 6inancial %ualism which means the e"istance of both 0i1 4rgani!ed money mar3et and 0ii1 =norgani!ed money mar3et+ Constit!ent of O&)+ Mone( Ma&6et a1 Central ban3 d1 4ther financial institutions b1 Com.ban3 c1 Co-operatives e1 Insurance Companies

Constit!ent of 5no&)anised+ M+ Ma&6et a1 #he money lenders c1 #he pawn bro3ers e1 6riend and relations b1 Indigenous ban3s d1 #raders and martinets f1 <andlords

Feat!&es t-at diffe&entiate t-e !no&)ani7ed mone( ma&6et fo& t-e o&)ani7ed mone( ma&6et+ a1 6le"ibility in loan transaction b1 :ersonal dealing with borrowers c1 2imple and sometimes crude system of accounting d1 ;lending of money lending with type of economic activities e1 Informal dealing with customers

f1 =tmost dealing about financial dealings > In <%Cs =norgani!ed sector controls significant section of the money mar3et. because of agricultural sectors dominance ? > 6low of funds between the organi!ed and unorgani!ed sector is very small. MONETARY IN/TIT5TION/ IN DE2ELOPIN3 CO5NTRIE/ #he Central ;an3 : :erform both traditional and nontraditional functions #raditional 6unctions : '. ;an3er to the govt. ). 7onopoly of note issue@li3e %Cs *. #he lender of the last report +. #he controller of credit ,. ;an3erAs ban3 -. -. :romotion of e"ternal stability > #he role of Central ;an3 in the economy dev. of the <%Cs, 0India, :a3. Ghana, 7alya1positive and significant 0 e"amp. India,1