2-р баг: Номин, Төрмөнх, Лхам-Янжин, Нансалмаа

Policy instruments of the Central banks

Central banks are supposed to be capable of influencing inflation through policy instruments and
have a detailed concept of the relationship between monetary policy and inflation. Compared to
the developing countries, the monetary transmission mechanism held by the developed countries
is distinctive. In the developed countries, which introduced the inflation targeting policy, the
monetary transmission mechanisms were precisely identified, the financial markets were highly
prosperous, and their exchange rate policy was flexible. In the developing countries, accelerating
economic restructuring was still lasting, the monetary transmission mechanism was incomplete,
the development of the financial markets was relatively low, concerns for the stability of
exchange rate were rather high when they started to have interest in inflation targeting policy by
the end of the 1990s. The main instrument of the inflation targeting policy is the interest rate, and
by modifying the policy rates, the central bank affects the interest of the market and commercial
banks, subsequently affects total demand, as well as inflation. Nevertheless, in the least
developed countries, policy interest rates are less effective on other interest rates and inflation
due to weak interest rate channels. In most countries (especially with high dollarization),
intending to turn policy interest rate to the main instrument, the transmission is getting
problematic because the exchange rate channel remains strong