Importance/Objectives of Monetary Policy in Developing Countries

The citizen like inflation, deflation, lack of employment opportunity, investment, output income etc defines developing country as a country where different types of economical and social harms are facing. In developing countries various types of economical problems are solved through the monetary policy. Monetary policy influences most of all inexpensive variables and activities through change in money supply in circulation and rate of interest.

So suitable monetary is formulated and implemented according to economic structure of an economy. The main importance of monetary policy is developing countries are summarized on following points.

(i)   Progress Role: Monetary policy plays a significant role in developing countries in accelerating economic development by influencing the money supply and rate of interest. Monetary policy is able to create hearten towards investment by the help of scheming inflation and deflation. Similarly, correction of balance of payment plays an important role for over all economic progress. That’s why monetary policy is able to run about development activities through by changing bank rate and minimum required ratio.

(ii)  Stepping up to Economic progress: In developing countries, the monetary policy should aim at promoting economic development. The monetary policy can play a vital role in acceleration to economic development. It influences the supply and uses of credit. Controlling inflation and maintaining equilibrium balance of payment.

(iii) Progress of Banking and Financial organizations: One of the main functions of central bank or primary aim of monetary policy is to establish more banks and financial institutions. Underdeveloped countries lack these facilities. These facilities will help in increasing banking habit, mobilizing voluntary savings of the people, channel zing them into productive uses and raising the rate of capital formation.

(iv) Debt organization: In the developing economy, debt management is one of the main functions of monetary policy. The tools under the aims of debt management are deciding correct timing and issuing of government bonds, stabilizing their prices and minimizing the cost of servicing the public debt. These tools collect the means and sources of economic development. Monetary policy helps it in goal specific way.

(v)  Facilitate to manage price increases: Monetary policy is an effective measure to control inflation. It plays a significant role in checking inflation. Increase in government expenditure on developmental schemes increase aggregate demand but collective supply of consumer’s goods does not increase in the same time. This increases the price level. The monetary policy controls inflationary tendencies by growing saving, checking expansion of credit by banking system and hopeless deficit financing by the government through tightening monetary policy.

(vi) Help to accurate the unfavorable balance of payment: Monetary policy in the form of interest rate policy plays as important role in corrects the balance of payments deficit. In the developing countries like Nepal, there is serious balance of payment difficulties to fulfill the planned targets of development. To develop infrastructure’ such as power, irrigation, transport, etc. and directly productive activities like iron, steel, chemicals, electrical, fertilizers, etc., developing countries have to import capita] equipment, machinery, raw materials, spares and components thereby raising their imports. The exports are almost stagnant. They are high priced due to inflation. As results, an imbalance is created between imports and exports, which lead to misbalance in the balance of payments. Monetary policy can help in decreasing the gap balance of payments deficit through high rate of interest. The high rate of interest attracts the inflow of the foreign investments and help in bridging the balance of payment gap.

(vii) Reduction of Economic Inequality: In an underdeveloped economy, there is wide disparity of income and wealth and absence of an integrated interest rate structure. Monetary policy can play a significant role to maintain equal distribution of income and wealth and a suitable rate of interest rate. The central bank should take effective steps that benefit the poor and to integrate the interest rate structure of the economy. For this, low rate of interest should be fixed for the poor and small farmers, and entrepreneurs and subsidy may be given for them. A suitable interest rate structure encourages savings and investment in economy and discourages unproductive loans and speculative.




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