Suggestion to improve the monetary policy

Monetary policy is government policy carried out by the Central Bank to control the
money supply and interest rates to affect the level of aggregate expenditure to achieve the level
of employment and controlling inflation. During inflation, the Central Bank like bank Negara
will conduct a contractionary monetary policy, which reduces the money supply and raise
interest rates to reduce aggregate spending to overcome the problem of inflation. While, during
the recession or deflation, the government will conduct expansionary monetary policy, the
increase in money supply and reducing interest rates in the market to increase aggregate spends
to combat unemployment.

Government strategy to overcome the economic crisis in 1973/74 and in the early 1980s
which is in line with economic growth as the approach Keynesian which are by increasing
subsidies, help the poor, outpace inflation through control of the money supply and increase
spending to implement basic infrastructure projects to stimulate economic activity. Increased
spending has resulted in high fiscal deficit soared to an unprecedented level of 16.6% in 1982
and the government was forced to make large loans to cover the deficit. However, since 1983 the
economy began to recover following the fiscal and monetary measures taken by the
Government.
The next Government to take drastic measures to improve the economy, particularly by
encouraging the private sector to implement a more active role in the privatization exercise,
relaxes the foreign equity ownership, reduce the corporate tax rate and provide incentives to
SMIS. Financially, the government has taken austerity measures and strict expenditure control
and development. The role of government is also more focused on the provision of
infrastructure to provide a better atmosphere to the private sector to continue to grow. The
government is slowly withdrawing from directly engaged in economic activity that can be
continued to the private sector rivals.
Monetary policy is the policy which is adopted by central bank of a country to control
supply of money and credit is known as monetary policy. In other words all those measures and
policy instruments which are adopted by central bank of country to control supply of money are
accorded as monetary policy. The monetary policy has been in use since classical economists as
a tool of economic stabilization. So, quantitative methods could be use to improve monetary
policy like discount rate, open market operations, reserve ratio, and moral suasion. First and
foremost, evaluation of discount rate policy. We know that the policy of discounting the bills or
discount policy consists of change in discount rate, therefore, whenever central bank changes its
discount rate it has an effect on the volume of discount loans and monetary base of commercial
banks. Whenever central bank decreases its discount rate the commercial banks get more
discount loans from central bank. This will enhance their monetary and reserve base, hence
money supply is expanded. On the other hand, if the central bank raises its discount rate, the
commercial banks will get less discount loans from central bank. This will contract their
monetary and reserve base. Hence money supply will shrink. It is told that the facility of central
bank wherefrom it provides discount loans to commercial banks is called Discount Window.
Secondly, the quantitative tool is open market operations. Under this monetary
technique the central bank sells or purchases government securities. During the period of
inflation or credit bonanza central bank sells govt. securities. The commercial banks and general
public purchases them in order to earn interest against them. As a result, the resources of the
commercial banks decrease and they reduce their endings. Moreover, when central bank sells
government securities their prices decrease leading to increase the market rate of interest. As
prices of bonds and interest rate are inversely affected. Because of rise in rate of interest banks
borrowing is discouraged. As a result, the supply of money and credit is shrunk in the country.
On the other hand, during deflation the central bank of the country purchases govt. securities
leading to increase their prices and decrease the rate of interest. Consequently bank borrowings
will increase. The investment, production and employment will be promoted. Thus we find that
when because of open market operations the govt. securities are sold the resources of
commercial banks will decrease and the interest rate will increase. Consequently, the excessive
money supply could be controlled.
Next, the method is reserve ratio. In certain cases the commercial banks even advance on
the basis of their excess reserves or by borrowing from foreign banks. In such situation the
power to end will not be affected when the reserve ratio is changed. The creation of money on
the part of banks also depends upon the demand for money. Therefore, during depression the
fall in reserve ratio will not be helpful in boosting investment. Because of changes in reserve
requirements the value of money multiplier changes. As a result, the supply of money will
change. As if central bank increases the reserves of the commercial banks which are a
percentage of demand and time deposits, the demand for reserves on the part of commercial
banks will increase. This will increase the interest rate of central bank. Whereas due to fall in
such reserves the money supply will increase. This will depress the interest rate of central bank.
Moral suasion also one of the qualitative methods. The central bank is the chief of money
market. As a result it advises the commercial banks. If central bank finds that commercial banks
have made excessive lending regarding speculation and hoarding. As a result, the inflation is
generating. In such situation, central bank can morally persuade the commercial banks to
abstain from such activities. Such like requests can also be made in respect of non-bank
financial institutions. However, such like instructions and requests can be effective in case of
developed economies. The countries like Pakistan where the banking system is backward such
like requests are hardly entertained.
Expansionary Monetary Policy: Increasing the MS to decrease UE: