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Monetary policy consists of the policy framed by the central bank or any other regulatory body or committee which regulates the rate of the money supply that will eventually affect the rate of interest. It can be sustained by changing the interest rate according to the prevalent market conditions, through purchasing and selling of government-related securities or bonds and by constantly changing a number of the fund's banks must require holding under its reserve.
Further, RBA will spot the provisions related to prices, set the interest rate and exchange rate according to the market demand and supply factor. It determines the cash rate that affects the financial market on the daily basis. It looks after the operations of the economy in the short and long run. Other rates of interest like mortgage and business rate are totally depending on cash rate which will have a substantial impact on the overall economy.
Monetary policy on the basis of the quantity of supply of money can be broadly classified into two kinds:
Expansionary monetary policy: Under this, the rate of money supply increase, results in the lower rate of unemployment, increase in the borrowing of funds by the private sector, which in turn will boost economic growth by ensuring smooth flow of funds.
Contractionary monetary policy:Contrary to the above, this policy is used by the regulatory body to lessen the economic growth in order to reduce the rate of inflation. In order to lessen the supply of money in the market, RBA increases the amount of funds that will be required to keep the other banks to the main central banks, resulted in the lower rate of employment and borrowing of funds by the banks.
Regulated body of Australia:
The reserve bank of Australia (RBA) is the regulated body appointment by the government to look after the matters and to frame out the monetary policy that will decide the rate of interest, RBA charge on the borrowed funds which will affect the supply of money and inflation rate in the long run. Further, the RBA is responsible for the of the currency notes (Ballantyne et. al., 2014).
Determination of the monetary policy:
In order to determine the monetary policy, RBA has to ensure the proper stability of the funds, employment rate and will be held responsible for the welfare of the general public. It has to keep the inflation under control so that it safeguard the value of money and will stimulate the proper and overall growth of the economy over the long period (Ballantyne et. al., 2014).
Theories related to monetary policy
Keynes’s Theory:It deals with the three major factors including interest rate, the multiplier factor of investment and the marginal efficiency of capital. Keynes explains how the three factors correlate with each other and have long run and short run effect due to the unemployment factor. Keynes insist on the fact that the sole role of monetary policy framework is to maintain the stability of interest rate in an equilibrium to smoothen the economy in the long run and take necessary steps to cope up with the factor of unemployment in the long run.
Free Market Theory: This theory deals with the determination of prices by the buyer and seller individually with no intervention by the government in it. It insists on giving what people desires rather than focuses on the particular group. It deals with free market operations in the economy. For example interest rate is to be determined by the buyer and seller demand and supply.
Models related to monetary policy
The Kim and Roubini Model:This model concludes that the price of oil must be an important factor in deciding the rate of inflation. These factors constitute the base for the framework of monetary policy. It considers rising of interest rate leads to increment in inflation. Without knowing the effect of interest rate, the rise in the inflation leads to innovation in the framework of monetary policy that creates a puzzle in the prices. Kim and Roubini use the index of oil to solve the issue related to prices. The prices of the economy may affect it globally in the market with regard to exchange rates. The function of government basically framed on three dynamic variables that include the exchange rate, the changing oil prices and the aggregate of the domestic monetary reserves. The origin of this model mainly relates to the exchange rate. It indicates that the exchange rates is the most important and may quickly respond the market and all related information. It forms the base for the ascertainment of demand and supply factor.
SVAR Framework Model:It relates to the macroeconomic activities. Under this model, it competes with the dynamic environment. In an open economy, it is necessary to find out the external factors that do not respond quickly to the market rate of operations. The next step involves the assumptions of a behavioral approach. It implies that the RBA authority does not respond quickly to the changing interest rates in relation to the foreign rate of interest in the market. While there are some variables that respond slowly in relation to market rate fluctuations. The both models study the market policy framework according to the fluctuations in the rate of interest.
Monetary policy during the year 2013:
Growth in the overall economy remained gloomy during the year that will force the IMF to revise their monetary It has seen the negative impact on both private and public sector that will adversely affect the of the economy in . In the year 2013, the GDP growth is relatively slow as compared to the previous years due to change in investment in the mining sector. Due to this, there is an in investment in coal and iron ore sectors and other sectors of LNG projects (Fraser, et. al., 2014). Exports are increases because of the investment in the resource projects. Further, the interest rates are to be kept low so there is an in the rental incomes which will gradually result in the increment of the business investments.
The above graph depicts the downfall of the economy in an . While the other economies of the nation been continuously rising which shows negative growth of Australian economy in the major partners of trading during the recent times. Due to the rate charged by the central bank, no difficulties are faced by the Australian banks in borrowing the funds on the and unsecured basis (Fraser, et. al., 2014).
NRI holds around 77% of the government securities on the issue of the commonwealth bond that will result in the net outflow from the public sector on the date of the maturity while the holding of the NRI in the banks will increase. The dollar price of Australia also remains little bit changed during the start (Fraser, et. al., 2014).
The agriculture income is facing an increasing due to the high prices of wheat and other related crops. Later the forecast has been revised and it is ascertained that there is a of 20% of the targeted crop as compared to the previous year (Costello, et. al., 2015).
The employment rate of has been gradually decreasing during the current year as compared to the previous year in 2012. This will increase the ratio of unemployed people to the total population of the country (Costello, et. al., 2015). The public department also sees a decline in the employment. To reduce the cost burden effect , iron and mining department are recruiting peoples as compared.
The negative credit rating has been assigned to the Australia from the credit rating agency. Due to this, the debt market downfall situation though people are more concerned about the security of their funds (Costello, et. al., 2015).
During the year 2014:
During this year, the bond and the equity markets been flourished in accordance with the global requirements. The growth of the Australian economy has been recorded on average. The economic conditions face a little rise. The iron and oil prices have been significantly declining contrary to that, base prices of metals increases. Due to that decrease in the oil prices, will result in the increase of supply with a to the global market followed by the increment in its expansion capacity (Brown & Karpavi?ius, 2016).
There has been recorded a little change in the GDP rate during the year 2014. All the activities concerned will show the modest growth. The confidence of the consumer has been reported low as compared to previous years, although it is consistent with same growth (Brown & Karpavi?ius, 2016).
The employment rate has been seen an upward increase during the current year as compared to the previous year. It has been recorded decline in the inflation rate during the current quarters. As a result of the increase in the employment, there will also increase in the activities while the pay growth remains downcast (Brown & Karpavi?ius, 2016).
The prices of the iron ore been shown a remarkable decrease in its price since 2009 which will eventually increase the of the iron ore. Due to a decrease in the oil prices, the export from Australia increase that will boost the economic condition. There has been seen a little increase in the base prices of metals too (Brown & Karpavi?ius, 2016).
While there is an of other currencies, the dollar has been faced a remarkable depreciation. But it remains higher in comparison to the other currencies at the start of the year. After facing despondent in the month between April to August, the average trading rate for the dollar has shown a remarkable rise during the year from September to October (Brown & Karpavi?ius, 2016).
The farm sector also faces a decline by 5% during the current year resulting in a in production of livestock. The reason of decline in the production is due to low rainfall (Brown & Karpavi?ius, 2016).
During the year 2015
During the year, the growth rate has been seen a below its average. Due to this, the economy of an like Chinese will see a rise in their economy growth. Due to the rate of interest, there is an in the activity of housing market. The credit growth of housing sector has seen an increment over the current months (Lee, et. al., 2016). Proper supervision measures are undertaken to evaluate the risk aroused from the housing market.
Commodity market in the last months. There is less demand from the Asia countries resulted in the price fall in Australia. The price of the iron ore has been seen a decline. Prices of coal and thermal shows declining phase that into constituting weaker demand from China (Lee, et. al., 2016).
Credit and Equity Markets:
There has been seen the fall of shares in the global market. But later on, it recovered gradually. During the year, the government authorities directly purchase the share from the in order to recover the economy (Lee, et. al., 2016).
It is depreciated by 3% against the US dollar which is considered as its low level since 2009. During this year, the fluctuation has been observed in the prices and later on it faces upward increases in the market (Lee, et. al., 2016).
The net outflow from the public sector is comparatively low as compared to previous years. It has been observed gradually decreasing that will put an effect on the securities of the government (Lee, et. al., 2016).
It has been observed an increment in the during the year, but wages of the must be kept low in comparison to the working condition. This increases the employment rate of Australia apart from having lower growth of population. As the problem of employment have , resulted in the prosperity of the economy (Lee, et. al., 2016).
Change in the interest rate will affect the GDP growth rate. It may also affect the rate of investment and consumption made. If the interest rate is kept low, the economy will demolish. The monetary provision contains a provision for the loans or stricter provisions then, it will decrease the amount of credit available to firms. This will affect the economy adversely (Lee, et. al., 2016).
It has been found that the interest rates has been gradually decreasing which will eventually increase the interest rates opposing to the if interest rates have been increasing that will significantly result in the lower It is assumed that if the interest rates are to be kept low, then the economy will boost up the monetary policy will also be affected the type of loan as well as the size of the . In other it has been said that more the loans, more it will affect the economy. Coming to general terms, the inflation rates and the interest rates will mostly affect the economy. The RBA announcement on the prices of equity will affect the policy maker and investor in the long run market. It must be framed by RBA keeping in view the expectation of market and then control the interest rate accordingly. When the cash rate is too kept high, then it would have a impact on the return of the stock (Lee, et. al., 2016). During this time, the government faced many problems related to debt and revenue generations. In order to have a monetary policy, it should emphasis on fiscal policy in a straight aligned way.
Despite keeping the low-interest rates, the economy of the Australia has not been flourished. When the interest rate is kept low, it will result in reducing the value of the currency as people are getting loans easily at a low rate of interest. This will make the product demand high and due to this, inflation rises up (McCredie, et. al., 2014). The value of currency depreciates resulted in making an adverse effect on import and export. When the RBA decides to cut off the interest rate, this will result in the increment of another problem that is unemployment in Australia at its highest mark. The data depicts that more than 30,000 people had lost their full-time employment due to this.
Apart from that, the country focuses much on the mining sector industries results in loosening of his competition among the various industries. With fewer imports and exports, the value of the currency depreciates adversely. More measures were taken to reduce the effect or to overcome this problem (McCredie, et. al., 2014). Due to this, many people in the country lost their jobs in the manufacturing sector. The next condition deals with the bad performance of Australian productivity from early 1990.That will not impact on the country future growth but also an emphasis on reducing the competition among the peer countries. Due to this, Australia becomes dependent on other global countries to stand in the market. During the times when other countries are having a positive contribution in the field of environment and employment, Australia will lose its impact on the overall contribution.
The thing is that there is no deficiency of talent and creativity in Australian people. The main problem lies in the performance and evaluation of innovation system, the of top level management to access the talent and execute it to its full capacity by evaluating the performance in a timely and adequate manner (Lu, et. al., 2015).
It has been observed that macroeconomics hinder the growth of the economy due to the inability to understand the effect of the changes in the policies. It is become necessary to understand that rates will not boost up the economy till growth remains subdued (Lu, et. al., 2015).
Based on the estimates of the interest rates and growth it would not be wrong to say that economy will suffer from the recession if its cash rates reduced to 3 to 4%.
In comparison to the other nation, the interest rates will comes to zero but the people will save money for their investment purposes. The negative thing is that most of the household and business have twisted the rate of interest. Since the time when the RBI began to target the inflation rate there has been seen declined in the growth rate over and over again and cash rate has declined adversely affecting the economy. In order to compete with the other currency on the international stage, the dollar needs to its prices (Jonson, 2015).
It has been stated that more research should be done in order to cover the benchmarks in the monetary policy. The result presented hereby shows loopholes in the policy and necessary changes should be done in order to revive the economy and boost it efficiently and effectively. The most important aspect with regard to monetary policy is inflation rate. It is to be managed in such a way that in the short run it would cope with the necessary business changes and in the long run, it would on keeping the inflation rate low so that the economy of the country prospers. The next thing that concerns comes to measurement of inflation. Factor such as rate of interest on hedge funds, the rate of foreign exchange, dollar price, net capital flows, various domestic economic conditions that will affect the monetary policy and growth of the economy in the long run. The business will also be affected by little bit change in the monetary policy. The monetary policy has been framed by the RBA after ascertaining the expectations of the society in the way relating to market and its return. Apart from that, it must be in conformity with the fiscal policy and must contain the provisions so that it must have a positive effect the economy and the economy will prosper. Changes in the inflation rate will affect the prices of goods through rate of exchange, import and export prices. The main framework of RBA is to maintain the cash rate according to the prevalent market conditions. A little bit change in the monetary policy will have an on change in the interest rate thaw ill have an effect on the financial market of the economy. It conducts open market operations in order to keep the demand and supply in the constant form. It sets the target for the long run operations so that the economy will prosper. It would make necessary alterations in accordance the economy requirements.
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