Examine factors that limits success /the limitations of the monetary policy in your country (low developed country)
- Unstable money multiplier; this makes it rather difficult to predict the amount of money in the circulation. This is due to inability to predict money supply accurately. This instability in money multipliers is mainly due to varying behaviour of public towards the banking sector.
- Underdeveloped money and capital markets; interest rate in these markets is so low that together with high rates of inflation, individuals and companies prefer to invest elsewhere other than securities and thus money policy has limited effects.
- High levels of liquidity held by commercial banks especially those owned by foreigners. They can easily get more liquid from their abroad to neutralize the restrictive monetary policy.
- Ignorance about open market operations makes the instrument inefficiency. People still prefer holding their wealth in cash form or other assets such as land, cows, buildings etc. therefore even if the Central Bank wishes to use monetary instruments, people are still ignorant about their operations.
- Large subsistence sector; the tools of monetary policy operate in monetary economy. Therefore monetary policy fails to influence this large segment of the economy where there is barter trade.
- There is lack of independence of the Central Bank from government. This results into incredibility of the Central Bank and hence inadequate in executing its monetary policy.
- There is corruption, mismanagement and inefficiency that discourage people from buying securities.
- Lack of banking facilities/concentration of commercial banks in urban areas resulting in failure to mobilize idle savings from rural areas.
- Disequilibrium in Balance of Payments: In less developed countries like Uganda, monetary expansion generally leads to increased imports and unfavorable balance of payments. This puts a limitation on the monetary policy.
- Lack of Integrated Interest Rate Structure: The various types of interest rates prevalent in the money market do not bear any definite relationship with the bank rate of the country. Any changes affected in the bank rate do not produce proportional changes in the other interest rates. The result is that the central bank of the country is unable to control the money market in an effective manner and monetary policy fails in its operation.
- Proportion of Credit to Money: The proportion of credit to money in the monetized sector is very small. Nearly 70-75% money supply consists of currency in active circulation. The bank deposits in such an economy form only a small and insignificant portion of the total money supply. This seriously limits the working of monetary policy.
- Shortage of Real Factors: Another problem in developing countries exists that there is a shortage of real factors like capital, entrepreneurial ability etc., therefore, monetary policy can do nothing about it.
- Existence of Inflation: A developing economy is highly sensitive to inflationary pressures. Government incurs huge expenditure on various types of development projects. It increases the effective demand much more than the output of consumer goods. The result is a sharp rise in the internal price level. Moreover during the course of hyperinflation, tools of monetary policy fail to work properly.
- Black Money: large quantity of black money exists due to political and economic factors. Black money is used for activities such as hoarding and speculative motives etc. As a result, it hinders the true spirit of the various objectives of monetary policy.
- Non-Banking Financial Institutions: According to Gurley and Shaw, non-banking financial institutions like “Life Insurance Corporation, State Financial Institutions and other Credit Financial Institutions, greatly hamper to achieve the objectives of monetary policy in a less developed country.
- Non-Banking Financial Institutions: According to Gurley and Shaw, non-banking financial institutions like “Life Insurance Corporation, State Financial Institutions and other Credit Financial Institutions, greatly hamper to achieve the objectives of monetary policy in a less developed country.
- Deficit Financing: In the modern world, deficit financing is the main source of financing development activities. But heavy doses of deficit financing have proved inoperative to achieve the objectives of monetary policy. For example, monetary authority wants to check the supply of money while deficit financing helps to increase its supply. Thus how both factors can operate simultaneously?
- Political interference
- Corruption especially in the use of selective credit control
CATEGORIES Economics
TAGS Dr. Bbosa Science
