Monetary policy of Kazakhstan

Monetary Policy of Kazakhstan

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate. – The supply of money;

– Availability of money;
– Cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

Monetary Policy in Kazakhstan:
During the years of independence Kazakhstan has undertaken reforms aimed at the development of market relations. Such as privatization, reform of public finances and the financial sector, pension reform, public administration reform at alias. One has to admit that over the years changes have been achieved positive economic results, consisting in the achievement of high economic growth, reducing inflation and inflation expectations, price stability and exchange rate of tenge, improving the investment climate. Largely due to the monetary policy of the National Bank of Kazakhstan, the country managed to achieve financial stability. Monetary policy gradually acquired a characteristic features of central bank policies like in countries which economies developing in the market laws. Currently, however, can not be said that the Republic of Kazakhstan has been shaped appropriate mechanism, that includes the central bank with established features, that are capable to use the tools of monetary policy to provide for the economic development of the country. Therefore, the study and analysis of the monetary policy of the National Bank is a hot topic for research.

Monetary Transmission Mechanism:
Monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real variables such as aggregate output and employment.

Kazakhstan National Bank:
The National Bank of Kazakhstan represents within the limits of its authority, the interests of Kazakhstan republic in the relations with the central banks, with banks of other countries, with international banks and other financial-credit organizations. Kazakhstan National Bank should not be guided by the aim of gaining profit in performing its tasks. Kazakhstan National Bank is accountable to the President of the Republic of Kazakhstan, but within the limits of authority granted by the legislation, is independent in its activity. Kazakhstan National Bank coordinates its activity with Kazakhstan Government, in its activity takes into consideration the economic policy of the Government and facilitates its implementation, if doing so is not in conflict with the realization of its main functions and implementation of monetary policy. The primary goal of Kazakhstan National Bank is to ensure the stability of prices in Kazakhstan. Tasks:

development and implementation of the state’s monetary policy; support of payment system functioning;
implementation of foreign exchange regulation and foreign exchange control; assistance for maintenance of financial system’s stability. Functions: realization of the state monetary policy in Kazakhstan; issuance of banknotes and coins on the territory of Kazakhstan; the function of a bank of banks; the financial advisor and financial agent of the Kazakhstan Government; organization and supervision of functioning of payment system; realization of currency control and currency regulation in Kazakhstan; management of the gold currency assets of the National Bank of Kazakhstan; control and supervision over the activities of the financial organizations and regulation of their activities within the competence of the National Bank of Kazakhstan; management of assets of the National fund of Kazakhstan.

Trends in Central Banking:
The central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks’ reserves on deposit at the central bank. The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements. If the central bank wishes to lower interest rates, it purchases government debt, thereby increasing the amount of cash in circulation or crediting bank’s reserves accounts. Alternatively, it can lower the interest rate on discounts or overdrafts (loans to banks secured by suitable collateral, specified by the central bank). If the interest rate on such transactions is sufficiently low, commercial banks can borrow from the central bank to meet reserve requirements and use the additional liquidity to expand their balance sheets, increasing the credit available to the economy. Lowering reserve requirements has a similar effect, freeing up funds for banks to increase loans or buy other profitable assets. A central bank can only operate a truly independent monetary policy when the exchange rate is floating. If the exchange rate is pegged or managed in any way, the central bank will have to purchase or sell foreign exchange. These transactions in foreign exchange will have an effect on the monetary base analogous to open market purchases and sales of government debt; if the central bank buys foreign exchange, the monetary base expands, and vice versa. But even in the case of a pure floating exchange rate, central banks and monetary authorities can at best “lean against the wind” in a world where capital is mobile.

Accordingly, the management of the exchange rate will influence domestic monetary conditions. To maintain its monetary policy target, the central bank will have to sterilize or offset its foreign exchange operations. For example, if a central bank buys foreign exchange (to counteract appreciation of the exchange rate), base money will increase. Therefore, to sterilize that increase, the central bank must also sell government debt to contract the monetary base by an equal amount. It follows that turbulent activity in foreign exchange markets can cause a central bank to lose control of domestic monetary policy when it is also managing the exchange rate. In the 1980s, many economists began to believe that making a nation’s central bank independent of the rest of executive government is the best way to ensure an optimal monetary policy, and those central banks which did not have independence began to gain it. This is to avoid overt manipulation of the tools of monetary policies to effect political goals, such as re-electing the current government. Independence typically means that the members of the committee which conducts monetary policy have long, fixed terms. Obviously, this is a somewhat limited independence. In the 1990s, central banks began adopting formal, public inflation targets with the goal of making the outcomes, if not the process, of monetary policy more transparent. In other words, a central bank may have an inflation target of 2% for a given year, and if inflation turns out to be 5%, then the central bank will typically have to submit an explanation. The Bank of England exemplifies both these trends.

It became independent of government through the Bank of England Act 1998 and adopted an inflation target of 2.5% RPI (now 2% of CPI). The debate rages on about whether monetary policy can smooth business cycles or not. A central conjecture of Keynesian economics is that the central bank can stimulate aggregate demand in the short run, because a significant number of prices in the economy are fixed in the short run and firms will produce as many goods and services as are demanded (in the long run, however, money is neutral, as in the neoclassical model). There is also the Austrian school of economics, which includes Friedrich von Hayek and Ludwig von Mises’s arguments, which argues that central bank monetary policy aggravates the business cycle, creating malinvestment and maladjustments in the economy which then cause downcycle corrections, but most economists fall into either the Keynesian or neoclassical camps on this issue.

Types of Monetary Policy:
The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals. Just what is Monetary Policy? Well, dependant upon to whom the question is being posed, the answer may slightly vary, but all in all the principle itself is still the same. Monetary policies are basically practices set forth to govern and ensure the stability, and growth of our economy. The Federal Reserve Board of Governors, who operates the Federal Reserve System, currently enacts such policies. Obtaining economic stability and growth requires the promotion of a healthy balance between consumer spending and inflation which can be achieved by understanding the history of how and why the Federal Reserve originally came to be, the basic tools used in Monetary Policy, and the administration and regulations set forth of such policies towards banks by the Federal Reserve. Prior to the Federal Reserve System, in the 1700s -1913, a more liberal approach to banking existed in the United States. During this period the banking system had primarily consisted of a large group of unrelated and unregulated banks with unrelated currency and no medium to clear it.

However, the major problems imposed upon the economy, as a result of the lack there of such needed relativity, were all relative to the one simple fact: The current banking system was not doing its job and immediate action was needed. The banks playing a major role serving as a conduit for social and economic policy at the time were unreliable, and the economy reflected just that. The bank’s depositors were uncertain as to the safety and availability of their funds. This uncertainty, deemed appropriate for its nature and its time, was unfortunately taken advantage of by the crafty and also led to many problems including widespread forgery and fraud. Banks were not communicating with one another, not honoring the other’s bank notes, nor were there strict rules in place defining just who could or could not be considered a ‘bank’. This extremely unsystematic system of banking ultimately resulted in an economic ‘breakdown’ or ‘crash’ in the stock market during an era commonly referred to as The Great Depression. The economy was in dire need of a new banking system. In 1913 Congress passed the Federal Reserve Act of 1913, thus the Federal Reserve was created. As with any system, the Federal Reserve System operates by means of tools designed to optimize its functionality as well as its performance.

One tool of the Federal Reserve is its use of Reserve Requirements that can either increase or decrease the money supply. Although a valid tool, it is rare that an increase in reserve requirement is made, due to the fact that the resulting effect would be less money on hand for banks to loan, thus lowering the amount of money in circulation. A decrease in the reserve would allow the banks more funds to lend and also stimulate spending. Discount Operations is another tool used by the Fed in influencing the loan demand and credit availability through adjusting discount rate. This rate is set by each of the 12 Federal Reserve Banks. Using discount rate to encourage or discourage borrowing and bank lending is dependent upon the desired effect that the Fed wants to make on the money supply. To increase money supply, the Fed lowers the discount rate, thus lowering costs of funds to banks for lending, and encouraging borrowing and economic growth. A decrease in discount rate has the opposite effect, and decreases the amount of borrowing and lending. One more tool, the most important and most frequently used of them all is the Open Market Operations tool. This is the Fed’s Authority to purchase and sell government securities, which have an immediate impact on the money supply. The purchase of securities increases money supply in paying for purchases by crediting the reserve accounts of banks; subsequently, increasing the rate of inflation. The sale of of securities tightens credit by reducing the money supply; thereby, reducing the rate of inflation. Ultimately, the Fed has the responsibility of molding the economic environment by taking the three aforementioned precise measures in influencing the flow of money and credit availability to the nation.

The banking system is highly regulated and is subject to directive by one or more banking agencies. The Federal Reserve System is one of the five regulatory groups with the power to oversee bank activity. The other four are the Office of the Comptroller (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), and state banking departments. The OCC, part of the Treasury Dept, has jurisdiction over national banks. It is responsible for chartering, examining, and supervising national banks. The FDIC is responsible for supervising and examining state-chartered commercial banks that are not Federal Reserve System members. The OTS regulates all federally chartered and many state-chartered thrift institutions, including savings banks and savings and loan associations. Each state has its own banking department responsible for chartering, supervising, and examining state-chartered banks within the limitations of the state. Applications for state charters are submitted to the banking departments of each individual state and they must pass qualifying tests. If a new bank wants membership in the Federal Reserve System and the FDIC, its application must be reviewed and accepted by those agencies as well. These banking departments also scrutinize the branches and agencies of foreign banks operating in their state. In summary, current monetary policies are simply our government’s attempts in restoring and maintaining our economic growth and stability.

Without these procedures put into practice, we may as well still be living in the 1700’s, amidst the chaos and crime resulting from such an unstructured banking system as described earlier. It is true, that in order to prevent repeating history, we must first understand it and learn from it. Likewise, in order to maintain economic balance, it is extremely imperative that we understand the history of banking as a whole leading up to the establishment of the Federal Reserve, the tools used in enacting monetary policies set forth by the Fed, and the regulations set forth to govern said policies.

Developing countries:
Developing countries may have problems establishing an effective operating monetary policy. The primary difficulty is that few developing countries have deep markets in government debt. The matter is further complicated by the difficulties in forecasting money demand and fiscal pressure to levy the inflation tax by expanding the monetary base rapidly. In general, the central banks in many developing countries have poor records in managing monetary policy. This is often because the monetary authority in a developing country is not independent of government, so good monetary policy takes a backseat to the political desires of the government or are used to pursue other non-monetary goals. For this and other reasons, developing countries that want to establish credible monetary policy may institute a currency board or adopt dollarization. Such forms of monetary institutions thus essentially tie the hands of the government from interference and, it is hoped, that such policies will import the monetary policy of the anchor nation. Recent attempts at liberalizing and reforming financial markets (particularly the recapitalization of banks and other financial institutions in Nigeria and elsewhere) are gradually providing the latitude required to implement monetary policy frameworks by the relevant central banks.

Price level targeting:
Price level targeting is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more certainty about future price increases to consumers. Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years. Uncertainty in price levels can create uncertainty around price and wage setting activity for firms and workers, and undermines any information that can be gained from relative prices, as it is more difficult for firms to determine if a change in the price of a good or service is because of inflation or other factors, such as an increase in the efficiency of factors of production, if inflation is high and volatile. An increase in inflation also leads to a decrease in the demand for money, as it reduces the incentive to hold money and increases transaction costs and shoe leather costs.

Monetary aggregates
In the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit. In the USA this approach to monetary policy was
discontinued with the selection of Alan Greenspan as Fed Chairman. This approach is also sometimes called monetarism.

While most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities.

Case Analysis:
Monetary policy operates by influencing the pricing of money i.e. ,the cost of borrowing and the income from saving the reserve of india sets the bank rate .this is an interest rate for the reserve bank’s own . It will influence interest rate change overdraft and mortgage as well as for saving account. A change in Bank rate will also and share . Most Bank would try to compensate for the loss of income, by adjustment in deposit rate to neutralize the impact on their net interest income they would reduce the cost of fond and also bring down the interest rate. This encourage saving to invest to spent the memory on alternative like property and company shares any fall in demand for there assets will reduce their price. Similarly the significant fall in interest rate will result in higher stock prices. In global market the exchange rate in influenced , both by expectation about future interest rate and by and unexpected changing in interest rate. This is because of investors expect interest rate to rise, they may be increase the amount they invest in a currency before interest rate actually rise.