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LOGO
Pakistan ‘smonetary policy
Presented by:Ambreen Jaseem
Farooq Anjum
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outline
Brief introduction1
Reserve requirement2
Interest rate3
Open market policy4
Brief conclusion5
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Brief introduction
Definition: government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans.
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Brief introduction
Government, central bank, monetary authority
↓ the supply of money
availability of money cost of money rate of interest
↓Objective: the growth and stability of the
economy
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Brief introduction
Expansionary policy: increase the total money supply,
combat unemployment, lower interest rates
Contractionary policy: Decrease the total money supply,
Combat inflation,Raise interest rates
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Tools of monetary policy
Reserverequire-
ment
Interest
rate
Open
market
policy
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Reserve Requirement
(or Required Reserve Ratio)
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Definition
The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes.
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Reserve Requirement Changes Affect the Money Stock
Increasing the reserve requirement
Reducing the volume of deposits
Reducing the money stock and raises the cost of credit
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Part 2: Effects: Reserve Requirement Changes Affect the Money Stock
Decreasing the ratios
Expansion of bank credit and deposit levels and a decline in interest rates
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Situation in Pakistan
Pakistan has raised its reserve requirment ratio ten times in 2007.
8.5% 9% 9.5% 10% 10.5% 11% 11.5% 12% 12.5% 13.5% 14.5%
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Effects
To promote the economic growth.
To control the currency flow, restrain inflation
To maintain the stability of the value of the currency
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The importance of interest rate in money policy
1.Interpreting the term structure
2.Interpreting the term structure
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The influnce of
changes of
interest rate
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1. Inflation
2. Investment
3. Consumption
4. Pressure of foreign exchange
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Discount rate and rediscount rate
discount rate : a kind of interest rate.when individuals or industries exchange the commercial paper (商业票据) for cash with the commercial bank before its due date, the bank will take off some interest from the amount of money the commercial paper represents and the individuals or industries get the rest of money. And the interest rate the bank uses is called the discount rate.
-------something to do with time value of moneytime value of money
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What’s the time value of moneyWhat’s the time value of money??
2007 10 yuan 2 bars of chocolate2 bars of chocolate
2008 10 yuan only 1 bar of chocolate
only 1 bar of chocolate
As time goes by ,the value of money decreases.----
-the so called time value of money
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How the discount rate influences the value of money?
10 yuan = 10*(1+10%)=11 yuan (2007) (2008) 9.1yuan = 9.1*(1+10%)=10yuan (2007 ) (2008) 10 yuan = 10*(1+10%)(1+10%)=12.1 yuan (2007) (2009)
In 2007,we can buy 2 bars of chocolate with 10 yuan , while in 2008, we have to pay 11 yuan for the same 2 bars of chocolate. the value of money actually decreases↓
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Rediscount rate
Individuals or industries
Commercial banks
Central bank
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rediscount rate
today
mainly refers to the interest rate the central bank charges commercial banks when they borrow money from the central bank.
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The function of rediscount rate
Rediscount rate ↑
commercial banks’ interest rate on loan↑
individuals’ tendency to borrow money ↓ cash flow in society↓
investment of individuals and industries ↓
economy get controlled
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some figures of China’s rediscount rate from 1993 to 2003.
1993 10.8
1994 10.8
1995 10.44
1996 9
1997 8.55
1998 4.59
1999 3.24
2000 3.24
2001 3.24
2002 2.7
2003 2.7
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Open Market Operation
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Outline
Definition of open market operationClassification of open market
operationImportance of open market operation Specific operations and Impact of
open market operation—how is open market operation conducted
China’s open market operation in 2008
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What is open market operation?
Open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other financial instruments. Monetary targets, such as interest rates or exchange rates, are used to guide this implementation.
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Importance of open market operation
controlling the money supply
achieving and maintaining a fixed exchange rate with relation to some foreign currency
guiding the trend of interest rates in the currency market
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Central Bank Bill
Central Bank Bill is short-term bond issued by The People’s Bank of China to retrieve the fundamental currency. The expiration of Central Bank Bill is characterized as handing the fundamental currency out.
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Pakistan’s open market operation in 2008
The principal guidance is to control the inflation and
1.preventing money supply from increasing too rapidly
2.quickening the revaluation of foreign exchange rate
3.raising the interest rates
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conclusion
An independent and effective monetary policy is essential
for effective economic management in Pakistan.
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