Monetary Policy of Bangladesh and Its Impact on Economy

1845 Words Aug 6th, 2010 8 Pages

Monetary policy is concerned with the measures taken to control the supply of money, the cost and availability of credit. Further, it also deals with the distribution of credit between the uses and the users, the lending and borrowing rates of the banks. In a developing country like ours the monetary policy has been effectively used as a tool for overcoming depression and inflation. As Prof R. Prebisch writes “The time has come to formulate a monetary policy which meets the requirement of economic developments which fit in to its framework perfectly.” Along with the economic growth the monetary policy has also to ensure price stability, as excessive inflation has an adverse
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Monetary policies can promote economic growth by ensuring adequate availability of credit and lower cost of credit. Easy availability of credits at low interest rate stimulation investment and thereby quickens economic growth.

The MPS of Bangladesh Bank says,

“Monetary policies at the second half of the FY07 continue to aim it supporting annual real GDP of 7.0 percent, while keeping the inflationary pressure under control.”

According to Bangladesh Bank a tight monetary policy will provide the appropriate environment under which the growth can occur in the long run. But in the short run there exists tradeoff between growth and inflation. Higher economic growth gives rise to money supply which leads an increase in aggregate demand and cause inflation.

A developing country like Bangladesh needs both control over inflation and a sustainable economic growth. Only by expanding the real scope of growth this objective can be achieved. When money supply exceeds the out put the aggregate demand rises beyond the ability of economy. Only by increasing real scope govt. can increases aggregate demand effectively with our any side effect. The growth rates of currency in circulation and demand deposits indicate the extent of inflationary bias. In FY05, growth rates of credit to public and private sectors both exceeded program levels, showing excess demand and inflationary bias, which also showed up on the liability side in the
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