Monetary Policy In Nepal
Monetary policy is one of the utmost significant policy to manage aggregate demand. Like other policies, the prime objectives of monetary policy to accomplish the macroeconomic aim or objectives such as stability, growth, full employment, satisfactory BOP and so on. Foreign exchange reserve plays dynamic role in the aggregate economic activities of the nation. As a developing nation Nepal, the demands for foreign exchanges are high for different types of development arrangement, trade and repay the debt and its interest. Foreign assets reserve affects money supply of the nation and money supply affects on different macroeconomic variables like price level, interest rate, exchange rate, exports, imports, production and employment which eventually …show more content…
In some years the net foreign exchange reserves are high and in some years are also low too. Encouraging BOP is one among the aims of monetary as well as fiscal policy.
The monetary approach to the BOP hypothesizes a negative relationship between the rate of extension of internal credit and the rate of change of foreign reserves. The monetary approach to the BOP identifies the BOP as a monetary phenomenon (Frenkel and Johnson, 1976). Johnson (1976) claims that a fundamental relationship runs from changes in internal credit to changes in net foreign assets—that is, inequalities in the internal monetary sector lead to inequalities in a nation‘s BOP, signified by the change in net foreign assets (Blejer,
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The knowledge and control over the internal monetary variables is considered to be the pre-condition for developing asuitable monetary policy. The literature recommends that BOP is one of the very imperative subjects to the policy makers in developing nations and is directly related with the internal excess demand for money. The literature on the monetary approach to the BOP recommends that BOP is a monetary phenomenon and specially determined by the imbalance in the internal money market. This does not mean that fiscal policy has no effect on the mechanisms of the BOP. Certainly, fiscal variables do affect BOP but through monetary channels and provide very significantconjectural framework through which BOP can be investigated. (Khan, 2008 a). The MABP assumes that in a small open economy the monetary stability in the BOP can be realized through the changes in monetary base. For example, if internally created money supply exceeds its demand then this excess supply of money force individuals to settle their portfolios by purchasing goods, services and bonds to return to stability (Khan, 2008
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