MONETARY ECONOMICS
Overall Objectives
In this subject students learn the concepts of money and its functions; creation of money; its demand and supply. Evolution of monetary theory and monetary policy. The channels through which monetary policy affects the economy. Various tools of monetary management.
A critical analysis of current issues in monetary policy, with particular reference to economic development and price stability. Coordination of monetary policy with fiscal policy and exchange rates policy. Examinees are expected to be in touch with the latest monetary and credit developments in Pakistan. Examinees should also be familiar with the objectives and working of International Monetary Fund.
After qualifying this subject the examinees will acquire broad understanding of the working of financial system and the place of monetary policy in the financial and economic management.
SYLLABUS
I. Money
Definition and basic functions of money. Evolution of various forms of money as means of payment; credit cards, ATMs and electric means specially computer.
II. Demand and Supply of Money
Demand for money in an economy. Creation of money. Assets side of the banking system: Net credit creation by the banking system (Net Domestic Assets) adjusted for developments in the External Accounts (Net Foreign Assets) of the banking system. Liabilities side: composition of M0, M1, M2 and M3. Components of Reserve Money (M0) and money multiplier. The behaviour of money multiplier and its policy implications.
III. Transmission Mechanism of Monetary Policy
This comprises the channels through which monetary policy affects the economy; Credit channel, Money or Interest Rate channel, Exchange Rate channel and Asset Price channel. Experience of developed and developing countries.
IV. Monetary Theories
Quantity theory of Money and its various versions. The monetarist approach. Liquidity preference theory and portfolio management theory.
V. Objectives of Monetary Policy
- Price stability through Prudent Monetary Policy – Inflation, various price indices, demand pull and cost push inflation
- Economic Growth – price stability & economic growth
- Soundness and stability of financial markets
VI. Central Banking and Monetary Policy Regimes:
(a) Monetary targeting
(b) inflation targeting
(c) Choice of Policy Anchor: volume of money, interest rate or exchange rate.
VII. Financial System and its Working
- Regulatory and Supervisory Authorities – State Bank of Pakistan (SBP) and Security and Exchange Commission of Pakistan (SECP)
- Financial Institutions and financial intermediation
- Financial markets: money market; capital market; and foreign exchange market, Innovations and new products & instruments.
- Financial Infrastructure
VIII. Monetary Policy in Operation: Pakistan
Formulation of monetary policy in the context of economic growth and price stability. Calculation of demand for money. National Credit Consultative Council NCCC. The concept and importance of Annual Credit Plan (Credit Budget).
(i) Credit Ceilings 1973 – 1992
(ii) Credit Deposit Ratio and Indicative Targets 1992 -1996
(iii) Credit Management through market based instruments and their mechanics of working: Discount rate (Repo rate) Cash Reserves Requirement (CRR) Statutory Liquidity Ratio (SLR) Open Market Operations (OMO) and Qualitative / Selective Credit Controls.
§ Money and Measurement the Stock of Money
§ Central Bank and Monetary Process
§ How Commercial Banks to create money
§ High Powered Money, Money Multiplier and determents of the money supply
§ Control of the Money Stock
§ Targeting Monetary Operations
§ Fiscal & Monetary Policy – Mix
§ Impact of Fiscal and Monetary Policy on AD – AS equilibrium
§ Short run VS Long run analysis
XI. Autonomy of a Central Bank
a) The case for autonomy: to hold price line, ensure soundness of financial system including the development of an efficient payments system.
b) Coordination between Monetary and Fiscal Policy. Institutional arrangements and Policy Coordination.
c) Areas of conflict of interests: Government’s / Treasury’s primary objective is to promote economic growth; Central Bank’s principal objective is price stability.
d) Experience of developed and developing countries.
XII. Monetary Policy and the Role of IMF
a) Monetary Policy and Exchange Rate. Determination of Exchange Rate. In market-based management of an economy the authorities can control either monetary policy or exchange rate. Crucial role of interest rate policy in the coordination of monetary and exchange rate policies.
b) International Monetary Fund. Objectives of IMF; IMF as a guardian of International Financial Architecture; Funds’ recent experience; East Asian crisis; inclusion of poverty reduction and economic growth in the Funds’ policies. Demand Management. The significance of conditionalities, particularly performance criteria in the IMF programs.
XIII. Financial Sector Reforms – Pakistan
a) Repressed Financial Sector before 1989; segmented markets and financial disintermediation; directed and subsidized credit; administered interest rates:
b) Various financial sector reforms programs; deregulation, liberalization and privatization in the financial sector, and sequencing of reforms.
c) Market oriented monetary policy
d) Assessment of financial sector reforms.
XIV. Interest Rate Theories and Interest-Free Banking (Islamic)
Practical implications of the Supreme Court verdict on Riba. Interest rate policy. The role of interest in allocation of investible funds, interest rate theories and financial system. Practical implications of the Supreme Court Order.
Core Reading Material
1. Jhingan, M.L. Monetary Theory, Konark Publishers
PVT Ltd. (Latest Edition)
2. Meenai, S.A. & Money and Banking in Pakistan,
Javed A. Ansari Oxford University Press, Karachi (Latest Edition)
SUPPLEMENTARY READINGS
1. Pakistan, State Bank of Monetary Policy Statement
2. Pakistan, State Bank of Annual Reports for the last five years; chapter I
& chapters on money and banking only.
3. Pakistan, State Bank of Annual & Quarterly Reports – Financial Sector
Assessment
4. Hanson, J.L. Monetary Theory and Practice, English Language
Book Society & McDonald & Evans, London (Latest Edition)
5. Chapra, M. Umer Towards a Just Monetary System
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