Monetary Policy Management

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Monetary Policy Management

Report on

Policy debate

Date: January 14, 2010

Author

Ahmad Sajjad Shabbir MS Banking & Finance

PGD Islamic Finance


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Abstract A policy is typically described as a purposeful plan of action to guide decisions and achieve sensible (rational)outcomes. In this report I will take a brief overview of monetary and fiscal policies, views of Keynes andMonetarists on policy and different other economist s debate on this that whether policy should be active orpassive and if active then would it be conducted by rule & law or by giving discretionary powers.

I will mainly study the debate of Keynes and Monetarists about policies and secondly I will study thearguments in favor of active & passive policy and try to conclude at the end of this report if policy should beactive then by which way we implement it and if passive then what are the reasons behind this.


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T able of contents What is policy? 3What is stabilization policy? 3

y

Monetary policy

y

Fiscal policyKeynes VS Monetarists 4y

Keynes view point

y

Monetarist view point

Role of fiscal and monetary policy in Keynes view 5y

Keynes real sector & monetary sector

y

Weakness in monetary policy

Role of fiscal and monetary policy in Monetarists view 10y

Monetarist real sector & monetary sector

y

Weakness in fiscal policy

The macro economic policy debate 13Whether a policy be active or passive? 13Keynes and Monetarists views about policy 13Lags in the implementation and effects of policies 14

y

Time lags

Inside lags

O utside lags

y

The difficult job of economic forecasting

y

Ignorance expectations and Lucas critique

Should policies be conducted by rule or by discretion? 17Distrust of policy makers & Political process 18Discretionary policy time inconsistency 18Rules for monetary & fiscal policies 19Arguments in the favor of Rules and discretionary policy 20Conclusion 20Bibliography 22


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1

What is policy? A policy is typically described as a purposeful plan of action to guide decisions and achieve sensible (rational)outcome(s).

A macroeconomic strategy implemented by governments and central banks to keep economic growth, pricelevels and unemployment stable.Mainly there are two policies that are use to manage the economy those are:

1.

Monetary policy2.

Fiscal policy

Now we will discuss briefly explain both of these policies with there objectives and tools then we will go intothis debate whether policy should be active or passive.

1.1

Monetary policy P olicy that is used to manage

1.

The supply of money2.

Availability of money

3.

Cost of money In any country is called monetary policy. This policy is controlled and implemented by the central bank of that country like in case of Pakistan monetary policy controlled and manage by state bank of Pakistan

1.2

Monetary policy management The management of expansation and contraction of the MS for the purpose of attaining one or moreobjectives; such as for full employment and control inflation

2

T ools of monetary policy

1.

O pen market operation2.

Bank rate

3.

Reserve ratio


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2.1

Open market operation The sale and purchase of government approved securities in the open market by the state bank is called theopen market operation.

2.2

B ank rate The discount rate fixed by a central bank

2.3

Cash reserve ratio It is the minimum cash reserve ratio that the commercial bank has to keep with the State bank

3

M onetary policy objectives

1. E xchange Stability

2.

Full E mployment3.

E conomic Growth

4

F iscal policy The policy that is concerned with the revenue and expenditure of the Government, fiscal policy isimplemented by the Government of the country it deals with the taxation and borrowing of money.

4 .1

S ome objectives of Fiscal Policy

1 .

Mobilization of resources2.

Accelerate the economic growth like directing the resources to the right channels

3.

To increase the employment opportunities through fiscal incentives and in the form of tax rebatesand concessions.

4.

To bring price stability, by fiscal tools5.

P rotect the economy from inflation and damaging competition from foreign countries thedevelopmental planning projects

6.

The changing of tax rates and changing government spending. The main point of fiscal policy is tokeep the surplus/deficit swings in the economy to a minimum by reducing inflation and recession.

4 .2

Tools of fiscal policy

1.

Taxes2.

Government spending


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5

K eynes s VS M onetarist

5 .1

K eynes View point:

In the macro economic policy debate Keynes views are different from monetarist Keynes was born into acomfortable English social class that considered itself born to rule he was a Capitalist. According to Keynes economy basically and inherently unstable in other words in economy ups and downscomes in aggregate demand and aggregate supply, and until and unless policy makers don t use both Fiscaland monetary policy to stabilize the economy these fluctuations will produced the unwanted results inaggregate output, unemployment, and inflation. In other words macro economic policies will move againstthe wind mean when there is depression in economy and when the economy is heated up there is need of policies to lift up and cool down the economy. In short according to Keynes to stabilize the economy at the equilibrium position there is always need of policies and fiscal policy is better to do this.


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The Keynesian -Monetarist

5 .2

View point of Monetarists:

According to monetarist the economy is basically stable. They are of the view that there is no need for anyeconomic policy because economic policies are the causes of fluctuation in the economy.Therefore according to the monetarists for fine tuning of the economy nothing is require rather the policymakers must keep in view the limitations of economic policies before implementing them.In short comparison of Keynes and monetarists

T ABLE 1

Keynesians Monetarists

The economy is basically and inherently unstable. E conomy is basically stable

Both fiscal& monetary policies are required tostable it but Best is Fiscal policy No need of policy

AS curve can be flat AS curve has a steep slope..

F F i i s s c c a a l l P P ool l i i c c y y MMoonneetta a r r y y R R u u l l e e


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6

R ole of F iscal policy and monetary policy in K eynes s view Now we will see that how Keynes proved that F. P is better than M. P to control the economy

6 .1

K eynes Real sector

1.

According Keynesian investment spending is less sensitive to rate of interest which means investmentcurve/ function is steep or less elastic in nature

Investment = f (i)

2.

Less elastic resultDegree of response on result

They also said interest rate and national income are also less sensitive to each other in goods market so IScurve is less elastic and steep in nature

3.

They also said prices and quantity demand also less sensitive to each other hence AD curve is also lesselastic of steep in nature.

6 .2

K eynes Monetary sector: Liquidation Preference theory: TO find out the

Md/p = Ms/p

1.

Interest rate and (M/p) d (real demand for money) are more sensitive to each other so (M/P)d curve is

more elastic or flat in nature2.

Interest rate & national income are also more sensitive to each other so liquidity of money (LM) curveis more elastic and flat in nature. Money market

Y (M/P)d i LM curve

I = f(Y) ---------- LM curve

(M/P)d = (M/P)s

y

Fiscal policy effects of IS curve

y

Monetary policy effects LM curve

To get out of the depression we have to adopt both policies (monetary policy , fiscal policy) and then

check how much % fiscal policy help and how much % monetary policy helps .so according to Keynesianfiscal policy helps more.


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6 .3

Real sector graphs:

1.

Investment function

Steep and less elastic relation Fig 1 i

I = f (i)

-ve relationship

I

I2.

IS curveSteep and less elastic relation

i Fig 2

Y = f (i)

-ve relationship

IS

Y

3 .

AD curve

Steep and less elastic relation

P Fig 3

Qd = f (P)-ve relationship

AD

Qd


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6 .4

Monetary sector graphs

Real demand for money Mtd curvey

Flat curve

Fig 4

i

(M/P)d = f (i)

(M/P)d

LM curve

i Fig 5

i= f (Y)

Y


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7

P roof of K eynes that F iscal policy is better than monetary policy According to Keynes school of thought fiscal policy is more effective to bring the economy out of depressionsituation as compared to monetary policy.

LMLM1

IS- LM Model E 2i2

i* E

i1 E 1

IS1IS

Y* Y1 Y2

AS

AD-AS Model

e1 e3e

P*

AS AD2AD1

AD

Y* Y1 Y2 Yf

y

Due to easy Monetary policy both LM and AD curves shift right side

y

Due to easy fiscal Policy both IS and AD curve Shift to right side

Hence it is proved that F.P is more effective than MP MP is less effective because it is associated with some weaknesses which are giving below

1.

Reverse causation2.

MP in depression

3.

Velocity of circulation of money4.

Monetary lags

5.


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7 .1

Weakness of monetary policy

7. 1 .1

R everse causation:Above we outlined that easy monetary policy may result in increased level of national income but Keynesianthink that such causation has also a reverse causation. It is experienced as:We know that Mtd = f(Y) accordingly when ever due to easy monetary policy level of income increases thetransitive demand for money increases. This will have the effect of increasing the rate of interest. Theincrease rate of interest may offset the expansionary effects of easy monetary policy. In such situation if

supply of money is increased to check rising rate of interest it may result in inflation. On the other sidewhenever due to tight monetary policy level of income decreases, the transitive demand for money willdecreases. This will have the effect of decreasing the rate of interest. The decreased rate of interest mayoffset the effects of tight monetary policy. In such situation if supply of money is increased to check thefalling rate of interest, it may result in deflation. All this shows that both the targets of rate of interest andsupply of money cannot be attained at the same time.

7. 1 .2

M onetary sector in depression:Keynesians also present the case of depression where changes in rate of interest do not influence level of

investment .accordingly MEI and IS curve become vertical. On the other hand because of liquidity trap LM

curve becomes horizontal. Thus in the presence of vertical IS and horizontal LM the easy monetary policywill fail depression from the economy.

7. 1 .3

Velocity of circulation of money:

According to Keynesians the velocity of circulations of money is concerned with the demand for money.

As Md = Mtd + Msd. The Mtd is attached with active money. Accordingly velocity of such money will bepositive. While demand for money which is concerned with speculation or money which is like an asset haszero velocity of money. All this shows that the velocity of circulations of money depends upon how moneysupply is distributed into Mtd and Msd. moreover the monetary policy which has an effect on active moneyhas an impact on the level of income and employment.

7. 1 .4

M onetary lags:Classical and monetarist are of the view that monetary policy is more effective for economic stabilization butmonetary policy is attached with time lags which hamper the effectiveness of monetary policy

7. 1 .5

R econigation lag;What will the future trend of economics activities, can not in predicted. In other words it is difficult to accessthat if today there is inflation, whether it will remain on inflation in future. if economy is experiencingdepression today, ether after six months the same depression will last for .such like situation is given the nameof Reconigation lag.

7.1

.6

Operating lag;

The operation lag raises when the need for some action is realized and when the actual step is taken to adoptsome policy measure. In other words, a time period may involve in the operation of some action. There arecertain economics and political implications of each monetary action .accordingly, the operational lag may beprolonging one.


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8

R ole of F .P and M .P in M onetarist view

8 .1

Real sector is flat

1.

According to Monetarists Investment Spending is more sensitive to rate of interest which meansinvestment curve is flats and more elastic in nature.

If we i 100% I will more than 100%.

2.

Interest rate and National Income are more sensitive to each other. IS curve is more elastic and flatter.

3 .

Price and Qd are more sensitive to each other. Hence AD curve is more elastic and flatter in nature.

Real sector of monetarist

1.

Investment functionFlat curve Fig 7

i

I = f (i)

I 2.

IS curve

i Fig 8

Y = f (i)

IS

Y


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3 .

AD curve

P Fig 9

Y= f (P)

AD

Y

8 .2

Monetary sector of monetarist

4.

Real demand for money curvey

Flat curve

Fig 10

i (M/P)d = f (i)

(M/P)d

5 .

LM curve

i Fig 11

i= f (Y)

Y


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8 .3

Proof of monetarists that monetary policy is better than fiscal policy

IS- LM Modeli LM LM1

E 1

E i*

E 2 IS1

IS

Y* Y

P AS

AD-AS Modele3

e e2AD2

ASAD AD1

Y* Y1 Y2 Yf Y

y

Due to easy F.P both IS and AD shift to right side.

y

Due to easy M.P both L.M and A.D curve shifts to right side

According to the Monetarists to free an economy from depression situation monetary policy plays andeffective role as compared to fiscal policy. F.P cant play as much an effective role as monetary policy playsBecause F.P has some weakness like fiscal lags,


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9

T he M acro economic policy debate

9 .1

Whether the policies be adopted or not?

In order to answer the following questions there has been made some argumentation that whether thepolicies should play an active or passive role.

&If the policy makers decide to operate some economic policy then should they use the discretionary poweror depend upon some rules.

9 .2

S hould policies be active or passive? Whether it is us or P akistan the economist is their economic affair departments are found busy inconsidering the state of economy i.e. whether the inflation rate is falling or rising whether the income &employment is rising or falling.In their consideration some economists are in favour that government should adopt easy fiscal policy ortight fiscal policy according to the situation otherwise we will have to face depression like 19 30. But few are favour of that we should not activate any kind of fiscal policy they are in favour of monetarypolicy.

9 .3

A ccording to the K eynesian: To considering all these things the Keynesian are in favour of depending upon active fiscal and monetarypolicies for economic stabilization.

9 .4

A ccording to the Monetarists:

Monetarists do not like depend upon fiscal and monetary policies for the economic stabilization. O r they depend upon passive type of economic policy as following problems are attached with these policies:


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10 P roblems in implementation of policies

There are some problems in the implementations of fiscal and monetary policies actively,

y

Lags in implementation and effects of policies

y

Difficult job of economic forecasting

y

Ignorance expectations & locus critique

y

Historical background.

10.1 Lags in implementation & effects of policies

Economic stabilization will become be easier if the effects of some economic policy are readily discerned.When we adopt some policy it needs some time to be implementing so that time duration is called

LAG IN IMP LEMENTATION P olicy makers would simply adjust their instruments to keep the economy on the desired path. Makingeconomic policy is just like to drive a car .A car changes direction almost immediately after the steering

wheel is turned .and just like that the policy makers arrange their instruments to keep the economy on thedesired track. But the implementation of policy is just like to sail a ship .a ship changes course long after the pilot adjuststhe rudder and once the ship starts to turn it continues turning long after the rudder set back to normal. Likea ships pilot economic policy makers face the problems of long lags which is even more difficult because thelength of lags are hard to predict. These create great complications to conduct fiscal and monetary policies.


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10.2 Types of time lags:

E conomist distinguishes between two lags in conduct of stabilization policy.

1.

Inside lag2.

O utside lag

Inside lag

The inside lag is the time between a shock to the economy and the policy action responding to thatshock

This lag arise because of

y

First the policy makers take time to recognize that a shock has occurred

y

Then put the appropriate policies in to effect

O utside lag: O utside lag is the time between a policy action and its influence on the economy

This lag arises because:y

Policies do not influence immediately on the economic factors like spending income and employment.

y

A long inside lag is central problem with using fiscal policy for economic stabilization. while themonetary policy has a much shorter inside lag than the fiscal policy because a central bank can decideon and implement a policy change in less than a day.

y

The advocates of passive policy argue that because of these long and variable lags associated withmonetary and fiscal policies the successful stabilization policy is almost impossible.

10.3 Difficult job of economic forecasting

Because the policy influences the economy only after a long lag. Therefore the successful stabilization policyrequires predicting accurate future economic conditions.

y

If we can not predict whether the economy will be in boom or recession in coming six months or ayear we cannot evaluate whether monetary or fiscal policy should now be trying to stabilize theeconomy.

y

U nfortunately economic developments are often unpredictable.

y

They are some measures used to predict the economic condition.

a)

O ne is known as leading indicators.b)

Second one is known as Macro E conometric Models.

These computer models made up of many equations, adopted by the Govt agencies and by public or privatefirms for making predictions and policy analysis. Ignorance expectations & Locus Critique

The prominent economist R O RER T L O CUS

As an advice giving profession we are in way are our heads.ByIgnorance : he means whenever the economist estimates the effects of an alternative economic policy. Theyare not completely aware of the conditions and so are not confident about them. By


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Traditionalexpectations

Adaptiveexpectations

Rationalexpectations

Expectations : He emphasized Issue of how people from expectations of the future.According to him expectations play crucial role in the economy because they influence all sorts of economicbehavior.

T ypes O f expectations

Adaptive expectations:According this approach it is assumed that

The people form their expectations of variable based on recently observed values of the variable.

Rational expectationsAccording to this approach it is assume thatPeople optimally use all available information including the information about current and prospectivepolicies to forecast the future Locus critique:According to Prof L O CU S, on the basis of traditional method when we analyze any policy we do not keep inview the effect of policy on expectations. Therefore, the criticism which is made on the analysis of traditionalpolicy called L O CU S CRIRIQ E EX AMPL E :An important example of L O CU S CRITIQ UE arises in the analysis of Disinflation. The cost of reducinginflation is often measured by the Sacrifice Ratio

SACRIFIC E RATI O = %age in GDP

% age in inflation Locus critique lesson:The locus critique leaves us with two lessons

y

Narrow lesson

y

Broad lesson

N arrow lesson:The narrow lesson is that economists evaluating alternative policies need to consider how policies oftenaffects expectations and, thereby, behavior.Broad lessonThe broad lesson is that policy evaluation is hard, so the economists engaged in task should be sure to showthe requisite humility. In this the up gradation of policies flexible and they are adoptable.Historical records:In judging whether government policy should play active or passive role in the economy, we must give someweight to the historical records if the economy has experienced many large shocks to AD and AS and policyhas successfully insulated the economy from these shocks then the case of far active policy should be clear.

y

Conversely, if the economy has experienced few shocks and fluctuations can be traced by interruptpolicy, then the case for passive policy should be clear.

y

In other words our few of stabilization policy has historically been stabilizing or destabilizing.

y

The historical record often permits more then one interpretations.


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G reat depressionA case in point

y

Some economists believe that a large contracctionary shocks to PVT spending cause thedepression

y

O ther believes that the large fall in money supply cause the depression

y

They assert that the depression would be avoided by passive monetary policy

y

Great depression can be viewed either as an example, why active MP and FP is necessary, or whyit is dangerous


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11 Should policies be conducted by rule or by discretion?

A second topic of debate among economists is whether policy should be conducted by rule or by discretion. By rule:

A policy will be implemented under rule if policy makers in anticipation announce, what will be the reactionof this policy in different situations, and then they follow this rule & law.y

A policy which has been adopted under some rule approach may be active as well as passive.

y

As an example

A passive policy rule might specify steady growth in the money supply of 3% per year.While an active policy rule might specify that MS should by increased by following method;

Money growth = 3% + (U A- U N) U nder this rule, if unemployment increases from its natural unemployment then money growth will increasesaccording to the value of .The rules try to stabilize the economy by raising or decreasing the growth rate. By discretion: The steps which are necessary to adopt to meet any economic issue, when implemented are called discretionA policy will be discretionary when the policy makers implement the policy according to situation of occurrence & decision separately for each case Discretionary powers Discretionary powers are those who have the authority to implement the policies.

11.1 Distrust of policy makers & Political process

Some economists believe that economic policy is too important to be left to the discretion of the policymakers.Although this view is more political than economic.

y

If in a country the politicians are inefficient like Pakistan they always entrusted to user the powers of using Fiscal policy, and monetary policy, because they always misuse of powers.

Incompetence in economic policy arises for several reasons:a)

Shifting of powers to special interest groups.

b)

Macro economics is complicated and the politicians often do not have sufficient knowledge to

make informed judgments.O pportunism in economic policy arises when the objective of policy makers conflict with the well being of the people.

y

Some economists fear that politicians use macro economic policy to further their own electoral ends.

y

All such means to say that the politicians in order to attain their election aim so often use economicpolicies under discretionary powers.

y

Manipulation of the economy for electoral gain, is called the political business cycle

y

Some economists have purposed constitutional amendments such as Balanced Budget amendment;that would tie the hands of legislators and insulate the economy from both incompetence andopportunism.


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11.2 Discretionary policy time inconsistency

Time inconsistency is that with the passage of t ime, conditions or situations does not remain same,there is inconsistency in time. So discretionary powers show inconsistency in their policies.

y

Some experts think that if we trust over our politicians, that the discretionary policy look better thatthe fixed policy of rule and law.

y This is because the discretionary policy is flexible on the ground of its structure and politicians willuse them following the changing circumstances.y

But due to time inconsistency which is attached with any of the policy. The policy experts consider rule approach better than the discretionary approach.

y

It has been observed that policy makers announce some of their policy so that economic agents coulddevise their expectations.

In coming days it is not necessary that the policy makers will fulfill their promise regardingtheir preannounce policy.

Therefore the situation of distrust is created in such situation of distrust is created, in such situation the rulemethod will be better that discretionary approach.

1 2 R ules for M onetary policy

Monetary policy is a policy adopted by the central bank; the policy makers suggest the following rules tostabilize the economy. Rules suggested by policy makers:-

a)

Role of money supply. b)

Nominal GDP targeting.

c)

Inflation targeting

Role of money supplyAccording to monetarists:

MS must increase at a constant rate every year. Because it is MS which creates fluctuations in the economy.Therefore to stabilize the economy MS must increase at steady rate.But according to few

In order to stabilize the economy, along with increment in ms at constant rate it is necessary to keepconstant he velocity of circulation of money, otherwise unnecessary flucations will like to occur.

N ominal G DP T argeting

Make it rule that ;

a)

if Nominal GDP > Targeted GDP Then,

AD P Inflation So, The MS will have to decrease


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b)

If

Nominal GDP < Targeted GDP Then,

AD L Y U nemployment P results Deflation. So,

The MS will have to be increased.

c)

If Nominal GDP = Targeted GDP

So,

The MS will not be changed. Inflation T argeting: If Actual Inflation > Targeted Inflation

Then, MS should be If,Actual Inflation < Targeted Inflation

Rules for fiscal policyAlthough most discussion of policy rules center on monetary policy, economists and politicians alsofrequently purpose rules for fiscal policy.

y

The rule that has received the most attention is the balanced budget rule (BBR)

y

U nder the balanced budget rule the government would not be allowed to spend more that its receivesin tax revenue.

y

Most economists oppose a strict rule requiring the government to balance its budget.

There are three reasons to believe that a budget deficit or surplus is some times appropriate or better thanBBR. Reasons: Why Budget deficit or surplus is better than BBR:


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A budget deficit or surplus can help to stabilize the economy. As whenever the goes into the recession,taxes automatically fall, and transfers automatically increases.These automatic responses help to stabilize the economy; they push the budget into the deficit. During recession T axes T ransfers BD If government made balanced budget, the role of fiscal stabilizers like taxes and transfer payments willcome to an end. If strict BB is pursued the depression will increases when expenditure are reducedbecause of fall in revenues.

y

A budget deficit or surplus can be used to reduce the distortion of incentives caused by the tax system.

T ax smoothing

Higher the rate of taxes more will be social cost of imposing tax.To keep the social cost of the taxes lower it is necessary that they should remain stable, rather heavyfluctuations. This policy is called the policy of tax smoothing.The tax rates can be smooth if when incomes are low during depression, government should make deficitbudgets.y

A budget deficit can be used to shift a tax burden from current to future generation.

Examples: Some economists argue that if the current generation fights to maintain its freedom, future generation benefitas well as bear some of the burden. To pass on some of the wars cost, the current generation can finance thewar with a budget deficit The government can later retire the debt by levying taxes on the next generation. These considerations lead most economists to reject a strict balanced budget rule.

1 3 A rguments in the favour of rules

Firstly:Both the monetary and fiscal policies affect the economy with a certain time lag. Any mistake in calculationof the length of the time lag aggregate the intensity of phase of business cycle.

Secondly:Rules lead to economic stability and keep the private economic decisions makers both accurately forecast thefuture.T hirdly:Rules as opposed to discretion will save the economy from the atrocities of politicians.Fourthly:Variations in the rate of monetary growth strongly dominate variations in the rate of nominal economicgrowth not in the real economic growth.Fifthly:E rrors and uncertainties associated with discretionary monetary policy are so numerous and vast that thediscretion would always lead to economic instability.


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Lastly:Discretionary policies can affect the economy only if it comes all of a sudden. Such as policy will be fool theprivate economic decision makers and as a result scarce economic resources will be misallocated.

1 4 A rguments in the favour of discretionary policy

The proponents of discretionary policy move the following arguments in favour of discretionFirstlyThe velocity of MS may charge in some unforeseeable way during recession or a boom and the constantmoney growth rule may aggravate the intensity of the phases of business cycle.Thus it is preferable that the central bank be given the discretion to adjust the MS to large and small changesin the velocity.Secondly:The time lag required for monetary and fiscal policy effect the economy can be incorporated into

discretionary policy by accurately forecasting the future course of economic activity.T hirdly:

Defenders of discretionary monetary policy argue that MS can readily be manipulated to counteract cyclicaleffects. They firmly state that the presence of errors and uncertainties can prevent the discretionary monetarypolicy from being perfectly counter cyclical but not from being mostly counter cyclical.Fourthly:The assumptions of wage price flexibility held by the rational expectations theorists in opposition todiscretionary monetary policy may not held in real world. Thus monetary policy will have real effects even if it does not come as surprise.

1 5 Conclusion:

From the above debate, we have analyzed whether a policy should be active or passive, while the economistsare facing Fluctuation. In this way, should a policy be arranged according to certain rules and regulations or the politicians should be given discretionary authority in this matter. We have also seen that countless(boundless) arguments are present in the support and in opposition as well, of each policy. So we reach to theconclusion that none of the policies has complete legitimacy. In addition to economic arguments, politicalarguments are also present in the support of each policy and in opposition as well. So, after the whole analysisgovernment can take some decisions weather the economic policy should be active or passive. It should bediscretionary or it should be set according to some rules and laws. Whatever the results would be, positive or negative, the economists have to play an important role in policy making. Finally we come at this point that incountries like Pakistan where no political stabilization and every Government is involved in corruption herefiscal policy cant work better to control the economy because politicians use their powers always in ve wayso monetary policy should be adopted in Pakistan but if people of Pakistan elect some honest and loyalgovernment then by using tax and expenditure system the economy of the Pakistan can not only be stable butalso growth can be seen.

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Monetary Policy Management