Goals and objectives of the monetary policy

A set of activities in the field of money circulation aimed at changing the money circulation and credit became known as the monetary policy.

In the world practice after the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives.

1. Rapid Economic Growth

2. Price Stability

3. Exchange Rate Stability

4. Balance of Payments (BOP) Equilibrium

5. Full Employment

6. Neutrality of Money

7. Equal Income Distribution

These are the general objectives of every central bank of a nation tries to attain by employing certain tools (instruments) of a monetary policy and reach the main goals.

Let us now see these objectives of monetary policy in detail:

1. Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the Central bank opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.

2. Price Stability: All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both inflation are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'.

3. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. The Central bank by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability.

4. Balance of Payments (BOP) Equilibrium: Many developing countries like India suffers from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.

5. Full Employment: The concept of full employment was much discussed after Keynes's publication of the "General Theory" in 1936. It refers to absence of involuntary unemployment. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy.

6. Neutrality of Money: Economist such as Wicksted, Robertson have always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability.

7. Equal Income Distribution: Many economists used to justify the role of the fiscal policy is maintaining economic equality. However in resent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. Monetary policy can make special provisions for the neglect supply such as agriculture, small-scale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society. [5]

In Kazakhstan the main task of monetary policy is the regulation of economic conditions by influencing the state of the credit and money circulation.

Monetary policy is an integral part of government economic policy aimed at combating with inflation to maintain the rate of the national currency and the normal conditions of the market. Monetary policy is a tool of "fine tuning" of economic conditions. Fundamental objective of monetary policy is helping the economic system to achieve such a level of production which is characterized by full employment and lack of inflation.

Objectives of monetary policy:

- maintaining the equilibrium on the money market, the control and regulation of the money supply;

- the fight against inflationary pressures in the economy, regulation of the course of national currencies;

- regulation of the economic cycle and alignment conditions;

- ensuring the meaningful sector of the economy with cheap credit resources.

The main purpose of monetary policy is the maintenance of low inflation (at 6-8%).

Achieving these goals will be provided by control of level of the monetary base, using all available tools from the National Bank. [6]

Monetary policy is directed either at stimulating credit and monetary emission (credit expansion) or on their control and treatment (credit restriction).

In the conditions of declining production and rising unemployment central banks are trying to revive the situation by extending credit and lower rates of interest rates. Conversely, during the economic growth the banks are trying to limit their lending, to raise interest rates to restrain the issue of payment of funds.

State regulation of the monetary sphere can be realized successfully only if the government, through the Central Bank, which is the National Bank of Kazakhstan, freely affect the extent and nature of private institutions as well as in developed market economy, they are the basis of all monetary systems. State regulation of the monetary sphere is carried out in several interrelated areas:

- State control over the banking system has the purpose of liquidity management of credit and financial institutions, i.e., strengthening their ability to meet the demands of depositors on time (by regulation the discount rate, by changing the reserve ratio).

- The management of government debt is the direction in government regulation, in the conditions of the budget deficits and the huge growth of debt, resulting in dramatically increased impact on the state credit loan market. In order to do this, NBRK uses different methods of government debt management: buying or selling government bonds, in various ways makes them more attractive to private investors.

- Regulation of the number of credit transactions and money issuing. This is used primarily to influence economic activity. This direction is closely related to the first and second directions.[7]

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