Operating Target of Monetary policy: The operational target of monetary
policy is an economic variable, which the central bank wants to control, and
indeed can control, to a very large extent on a day-by-day basis through the
use of its monetary policy instruments. It is the variable the level of which
the monetary policy decision making committee of the central bank actually
decides upon in each of its meetings.
Monetary policy in developing
economies mainly includes five major macro variables: output growth, inflation,
interest rate, exchange rate, and money supply. The success of monetary policy
hinges on a
skillful interaction of
these variables by the central bank. A pictorial presentation of a star usually
features five corners where five major variables related to monetary policy can
be placed. If we connect all the corners with outer lines, the star turns into
a pentagon without changing the essence of the model that describes the
interconnectivity of the major variables of monetary policy.
The variables fall into three
different levels: operational, intermediate and final. Money supply and
interest rates are often used as operating targets to influence the
intermediate targets such as inflation and exchange rates. Economic growth is
the final target whose rise increases employment and thus reduces unemployment
and poverty.
How BB tries to Achieve: BB uses the reserve money (operational target)
program to target a growth path for broad money (intermediate target)
consistent with the projected rate of GDP growth
and inflation. Annual monetary program is continually monitored and adjusted in
light of unfolding events. The actual developments are also closely monitored
to keep in line with the program. Tracking the monetary program and its
components on a regular basis allows BB to monitor
the growth rates of currency in circulation and demand deposits as early
indicators of inflationary bias. Similarly, growth of domestic credit against
the program target and rate of deposit mobilization indicate prevalence of
excess demand induced by inflationary expectation. Apart from these slope of
yield-curve, exchange rate, asset prices etc. are also monitored by the BB to
assess market demand for liquidity and the inflationary expectation in the
economy. Such a regular scrutiny allows BB to follow up with corrective
measures as appropriate with a timely manner.
