STABILISATION

POLICIES
 INTRODUCTION

Macro economics deals with such aggregates which influence

and mold economic growth.

The study of aggregate demand, Aggregate supply, aggregate

saving, aggregate investment, aggregate output, aggregate
income, aggregate employment, money supply, inflation,
deflation etc. give an insight into the functioning of an economy.

It also includes policies such as monetary policy, fiscal policy,

exchange rate policy, physical control etc.
CONCEPT OF ECONOMIC
STABILITY
Promoting economic stability is partly a matter of avoiding economic  and 
financial  crisis.

Economic  stability  implies  avoiding  fluctuations  in  the  level  of 

economic  activities  a  100%  stability  is neither  possible  nor  desirable. 

A  stabilization  policy  is  a  set  of  measures  introduced  to  stabilize  a 

financial  system  or  economy. 

It  can  also  refer  to  measures  taken  to  resolve  a  specific  economic 
crisis.

The  initiative  is  taken  by  the  government  or  Central  Bank  or  both. 

Such  stabilization  policies  can  be  painful,  in  the  short  run,  for  the 
economy  because  of  lower  output and  higher  unemployment. 
DIFFERENT INSTRUMENTS OF
ECONOMIC STABILITY
Monetary Policy

Fiscal Policy 
 MONETARY POLICY
Monetary policy:

deals with  the  total  money  supply  and  its  management  in  an 
economy. 

Its essentially  a  programmed  of  action  undertaken  by  the  monetary 

authorities  generally  the  central  bank to  control  and  regulate  the 
supply  of  money  with  the  public  and  the  flow  of  credit  with  a  view 
to achieving  economic  stability  and  certain  predetermined 
macroeconomic  goals.

Monetary policy can be explained in two different ways.
Narrow Sense
Broad Sense
Different writers have defined monetary policy in dif
ferent ways as follows..

According  to  RP  Kent,  “Monetary  policy  is  the 

management  of  the  expansion  and  contraction  of the 
volume  of  money  in  circulation  for  the  explicit  purpose  of 
attaining  a  specific objective  such  as  full employment”.

In  the  words  of  D.C.Rowan,  “The  monetary  policy  is 

defined  as  discretionary  act  undertaken  by  the authorities 
designed  to  influence  the  supply  of  money,  cost  of  money 
or  interest  rate  and  the availability  of  money”.
Contd…
Credit  policy  which  is  different  from  the  monetary  policy 
affects  allocation  of  bank  credit  according  to the  objective 
of  monetary  policy.

The  government  in  consultation  with  the  central  bank 

formulates  monetary  policy  and  it is  generally carried  out 
and  implemented  by  the  central  bank.

Monetary  policy  is  passive  when  the  central  bank  decides 

to  abstain  deliberately  from  applying monetary  measures. 

The  Scope  and  effectiveness  of  monetary  policy  depends 

on  the  monetization  of  the  economy  and the  development 
of  the  money  market.
OBJECTIVES

It  should  be  designed  and  directed  to  achieve  different 

macroeconomic  goals.  

The objectives  may  be  manifold  in  relation  to  the  general 
economic  policy  of  a  nation.  

The  various objectives  may  be  inter  related,  inter 

dependent  and  mutually  complementary  to  each  other.  

They may also be mutually  inconsistent  and  clash  with  each 

other.  

The  priorities  of  the objectives  depend  on  the  nature  of 
economic  problems,  its  magnitude  and  economic  policy  of 
a nation. 
General objectives of monetary policy

Neutral money policy

Price stability

Exchange rate stability

Control of trade cycles

Full employment

Equilibrium in the balance of payments

Rapid economic growth

 FISCAL POLICY
Fiscal  policy  is  an  important  part  of  the  overall  economic 
policy  of  a  nation.   It  is  being  increasingly used  in 
modern  times  to  achieve  economic  stability  and  growth 
throughout  the  world. 

Lord  Keynes for  the  first  time  emphasized  the  significance 

of  fiscal  policy  as  an  instrument  of  economic  control.   It
exerts  deep  impact  on  the  level  of  economic  activity  of  a 
nation.
MEANING
The  term  “fisc”  in  English  language  means  “treasury”,  and 
as  such,  policy  related  to  treasury  or government  exchequer 
is  known  as  fiscal  policy. 

DEFINITIONS
In  the  words  of  Ursula  Hicks,  “  Fiscal  policy  is  concerned  with  the 
manner  in  which  all  the  different elements  of  public  finance,  while 
still  primarily  concerned  with  carrying  out  their  own  duties  [as  the
first  duty  of  a  tax  is  to  raise  revenue]  may  collectively  be  geared  to 
forward  the  aims  of  economic policy”.

2Gardner  Ackley  points  out,  “Fiscal  policy  involves  alterations  in 

government  expenditures  for goods  and  services  or  the  level  of  tax 
rates.   Unlike  monetary  policy,  these  measures  involve  direct
government  interference  in  to  the  market  for  goods  and  services  [in 
case  of  public  expenditure]  and direct  impact  on  private  demand  [in 
case  of  taxes].
 Fiscal tools
Subsidies,  development  rebates,  tax  relief’s,  tax  concessions, 
tax  exemptions,  and  taxholidays,  freight  concessions,  relief 
expenditures,  debt  relief’s,  transfer  payments,  publicy works
programs  etc.  are  some  of  the  main  tools  of  the fiscal  policy.
OBJECTIVES

To achieve desirable price level.

To Achieve desirable consumption level.

To Achieve desirable employment level.

To achieve desirable income distribution.

Increase in capital formation.

Degree of inflation.
 IMPLEMENTATION OF MONETARY
POLICY IN INDIA
OBJECTIVES
In India, the objectives of monetary policy evolved as maintaining
price stability and ensuring adequate flow of credit to the
productive sectors of the economy.

FRAMEWORK
The monetary policy framework in India from the mid-1980s till
1997-98 can be characterized as a monetary targeting framework
on the lines recommended by Chakravarty Committee (1985).
In the 1990s, the increasing market orientation of the financial
system and greater capital inflows imparted instability to the
money demand function.
The multiple indicators approach continued to evolve and was
augmented by forward looking indicators and a panel of
parsimonious time series models.
OPERATING PROCEDURE
Operating procedure refer to the day to day management of
monetary conditions consistent with the overall stance of
monetary policy.

It is in essence the ‘nuts and bolts’ of monetary policy.

It involves:
The choice of the operational target;
The nature, extent and the frequency of different money market
operations by the central bank
The use and width of the corridor for very short-term market
interest rates and; finally, the manner of signaling policy intentions.
INDIAN EXPERIENCE
Consistent with the objectives and policy framework, the
operating procedure of monetary policy in India has also
witnessed significant changes.

The choice of targets, instruments and operating procedure was

circumscribed to a large extent by the nature of the financial
markets and the institutional arrangements.

The year 1992-93 was a landmark in the sense that the market
borrowing program of the government was put through the
auction process.

The Narsimham Committee (1998), noted that the money

market continued to remain lopsided, thin and volatile and the
Reserve Bank also had no effective presence in the market.
POLICY FORMULATION PROCESSES

The process of monetary policy in India had traditionally been

largely internal with only the end product of actions being made
public.

The process has overtime become more consultative,

participative and articulate with external orientation.

Several new institutional arrangements and work processes have

been put in place to meet the needs of policy making in a
complex and fast changing economic environment.
Processes of Monetary Policy Formulation
INFORMATION DISSEMINATION AND
POLICY COMMUNICATION

It is generally believed that greater information dissemination

and policy communication could lead to better policy outcome.

For example, the US Federal Reserve, since 1994, appears to

have been providing forward guidance, while the ECB appears
to be in the mold of keeping the markets informed rather than
guiding it.
Information Dissemination and Policy
Communication
 SUMMARY
Stable economic conditions are a pre requisite for a systematic
and smooth economic growth.

Monetary policy is the policy of the central bank, it consists if

using such instruments as bank rate, open market operations,
variable reserve ratio and selective credit controls like margin
requirements, moral suasion, direct action, rationing of
consumer credit, etc. to regulate the supply of money in
accordance with the requirements of the economy.

Fiscal policy or the budgetary policy of the government refers to

the policy of the government regarding taxation, public
expenditure, and management of public debt.

Physical policy refers to direct control on different activities by

the government to achieve the desired goal.