Monetary Policy In Nepal

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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,…show more content…
It delights the supply of money as endogenous by assuming a response from the BOP through changes in foreign reserves to changes in the monetary liabilities of the central bank and government (Borts, Hanson 1979 a). One of the significant enquiries of monetary policy is the extent to which the monetary authority of an open economy can affect the price level or the other opinions of the demand for money, such as the level of real output and the interest rate. If it were the case that these could not be changed, then any upsurge in monetary liabilities of the authority would be met by an equal and balancing outflow of foreign reserves (or an equi-proportionate rise in the price of domestic goods and foreign exchange), and one would have to argue that monetary policy had no influence on the real responses of the system. (Borts, Hanson 1979 b) The nature and usefulness of the monetary policy depends upon the particular nature of the money supply instrument. The knowledge and control over the internal monetary variables is considered to be the pre-condition for developing a suitable 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

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