Monetary and Fiscal Policy

Monetary Policy & Fiscal Policy
Definition of Monetary Policy
• Monetary Policy refers to the credit control measures

adopted by the central bank of a country.
• Monetary policy refers to the actions undertaken by a

nation's central bank to control money supply and achieve
macroeconomic goals that promote sustainable economic
growth.
Two Major Types of Monetary Policy
1. Expansionary Monetary Policy

Expansionary or easy monetary policy aims at encouraging
spending on goods and services by expanding the supply of credit
and money
2. Contractionary Monetary Policy

Contractionary or tight monetary policy aims at preventing
inflation by contracting the money supply.
Instruments of Monetary Policy
1. Quantitative Instruments 2. Qualitative Instruments

i. Bank Rate i. Credit Rationing and Ceiling
ii. Open Market Operation
ii. Regulation of Consumer
iii. Cash Reserve Ratio (CRR)
Credit
iv. Statutory Liquidity Ratio (SLR)
v. Repo and Reverse Repo
iii. Moral Persuasion
iv. Direct Action
Quantitative Instruments
1. Bank Rate
• A bank rate is the interest rate at which a nation's central bank lends money to
domestic banks, often in the form of very short-term loans. Managing the bank
rate is a method by which central banks affect economic activity.
• Lower bank rates can help to expand the economy by lowering the cost of funds
for borrowers, and higher bank rates help to reign in the economy when inflation
is higher than desired. Current Bank rate in Bangladesh is 4%
2. Open Market Operations (OMOs)

• 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 instrument.
• Central Banks purchase government securities to increase the supply of money
and sells them to reduce the supply of money.
3. Cash Reserve Ratio (CRR)

• The Cash Reserve Ratio refers to a certain percentage of total deposits the
commercial banks are required to maintain in the form of cash reserve with the
central bank.
• Lower CRR can increase the supply of money in the economy whereas higher CRR
can decrease the supply of money in economy. Currently the CRR rate in
Bangladesh is 4%.
4. Statutory Liquidity Ratio (SLR)

• The Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the
commercial bank is required to maintain with them in the form of liquid assets in
addition to the cash reserve ratio.
• Lower SLR can increase the supply of money in the economy whereas higher SLR
can decrease the supply of money in economy. Currently the SLR Rate in
Bangladesh is 13%.
5. Repo and Reverse Repo
• The term ‘Repo’ stands for ‘Repurchase agreement’.
• Repo rate is the rate at which central bank lends money to commercial
banks if they face a scarcity of funds.
• Commercial banks sell government securities and bonds to central bank with
an agreement to repurchase the securities and bonds from the central bank on
a future date at a pre-determined price including interest charges.
• Current Repo Rate is 4.75%.
• Reverse Repo rate is the rate at which the central bank borrows funds from
the commercial banks in the country.
• In other words, it is the rate at which commercial banks in India park their
excess money with the central bank usually for a short-term.
• Current Reverse Repo Rate is 4.00%.
Policy Implementation
Expansionary Monetary Policy Contractionary Monetary Policy
1. Decreasing Bank Rate 1. Increasing Bank Rate

2. Purchasing Government Securities 2. Selling Government Securities
3. Decreasing CRR 3. Increasing CRR
4. Decreasing SLR 4. Increasing SLR
5. Decreasing Repo Rate 5. Increasing Repo Rate
Qualitative Instruments
1. Credit Rationing and Ceiling

Credit rationing is a method by which the Central Bank seeks to limit the
maximum amount of loans and advances and, also in certain cases, fix
ceiling for specific categories of loans and advances.
2. Regulation of Consumer Credit

Central bank can regulate consumer credit by increasing or decreasing
down payment and the number of instalments of repayment of such credit.
Qualitative Instruments
3. Moral Persuasion
Moral persuasion means persuasion and request. To control inflationary
situation, central bank persuades and request the commercial banks to
refrain from giving loans for speculative and non-essential purposes.
4. Direct Action
The Central Bank has the authority to take strict action against any of the
commercial bank that refuses to obey the directions given by it.
Definition of Fiscal Policy
• The word ‘fisc’ means ‘state treasury’ and fiscal policy refers to
policy concerning the use of ‘state treasury’ or the government
finances to achieve the macroeconomic goals.
• Fiscal policy involves the decisions that a government makes
regarding collection of revenue, through taxation and about
spending that revenue.
• This policy is also known as budgetary policy.
Instruments of Fiscal Policy
1. Budget
• A Budget is a detailed plan of operations for some specific future period that is
expressed in numerical terms.
• Possible Scenarios:
• Balanced Budget: Govt. Expenditure = Govt. Revenue
• Budget Surplus: Govt. Expenditure < Govt. Revenue
• Budget Deficit: Govt. Expenditure > Govt. Revenue
2. Tax
• Tax is a non-penal but compulsory contribution to state revenue, levied by the
government on workers' income and business profits, or added to the cost of some
goods, services, and transactions.
• Types of Tax:
• Direct Tax: Income Tax, Wealth Tax etc.
• Indirect Tax: VAT, Customs Duty etc.
Instruments of Fiscal Policy
3. Public Expenditure
• Public expenditure is spending made by the government of a country on collective
needs and wants such as pension, salaries, infrastructure, etc.
• Three Types
• Current Expenditure: The wages and salaries of public employees
• Capital Expenditure: money spent on roads, bridges, schools, hospitals, military equipment etc.
• Transfer Payments: This type of government spending does not contribute to GDP because
income is only transferred from one group of people to another in the nation. Includes welfare and
unemployment benefits, subsidies to producers and consumers etc.
4. Public Debt
• Public debt is defined as any money owed by a government agency.
• Includes internal borrowings, borrowing from central bank, borrowing from
international organizations like World Bank, IMF, ADB etc.
Two Major Types of Fiscal Policy
1. Expansionary Fiscal Policy 2. Contractionary Fiscal Policy

• Policies that try to increase the output • Policies that try to decrease the output
of the economy. of the economy.
• Is used during recession or contraction. • Is used during excessive inflation.
• The government can do two things: • The government can do two things:
1. Decrease Taxes or, 1. Increase Taxes or,
2. Increase Spending 2. Decrease Spending
That’s All for Today

Monetary and Fiscal Policy

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Monetary and Fiscal Policy

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Monetary Policy & Fiscal Policy

Definition of Monetary Policy

• Monetary Policy refers to the credit control measures

• Monetary policy refers to the actions undertaken by a

1. Expansionary Monetary Policy

2. Contractionary Monetary Policy

1. Quantitative Instruments 2. Qualitative Instruments

2. Open Market Operations (OMOs)

3. Cash Reserve Ratio (CRR)

4. Statutory Liquidity Ratio (SLR)

Expansionary Monetary Policy Contractionary Monetary Policy

1. Decreasing Bank Rate 1. Increasing Bank Rate

1. Credit Rationing and Ceiling

2. Regulation of Consumer Credit

1. Expansionary Fiscal Policy 2. Contractionary Fiscal Policy

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