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Effectiveness of Monetary Tools in the Regulation of Economy

Monetary stimulus is a potent tool to regulate economic activity, along with other measures. The ebb and flow of economic activity and the crest and trough of economic/business cycle can be effectively controlled through this process. However, prolonged use of these tools will escalate the cost of borrowing for the government, compelling it to print currency or further borrow at high rates to repay this debt.<br><br>For more information visit: https://pakonomic.com/effectiveness-of-monetary-tools-in-the-regulation-of-economy/<br>

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Effectiveness of Monetary Tools in the Regulation of Economy

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  1. Effectiveness of Monetary Tools in the Regulation of Economy Monetary stimulus is a potent tool to regulate economic activity, along with other measures. The ebb and flow of economic activity and the crest and trough of economic/business cycle can be effectively controlled through this process. The main levers of monetary stimulus are interest rate management and quantitative easing or open market operation in Pakistan’s terminology. Through the interest rate, movement of monetary supply into the system is controlled and is largely driven by the level of inflation. If the rate of inflation is higher than the target, in that case, rates are hiked, So, the money supply could be restricted due to scarcity of credit in this scenerio. Since it becomes costly in this case. This action helps in bringing down inflation and equates the output level with the money supply. Similarly, in the event of low inflation expectations and deflationary pressures, the rates are lowered to stimulate demand and defy the recessionary trend that the economy is experiencing as a result. The discount rate is another tool through which monetary expansion is monitored and controlled. it is the rate that the central bank charges its members to borrow at its discount window. This facility is in line with the function of the central bank i.e. lender of last resort. This is the rate at which promissory notes of customers are re-discounted by banks to meet their urgent liquidity needs. Using this window is considered to be a stigma, as the bank using this window signifies that it is in financial trouble, which further jeopardizes its creditworthiness. At present, Pakistan’s economy is relying on making local currency securities like T-bills and PIBs more attractive to local as well as foreign buyers by offering high rates on these securities. However, prolonged use of these tools will escalate the cost of borrowing for the government, compelling it to print currency or further borrow at high rates to repay this debt. For More Information Visit Here: https://pakonomic.com/

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