• Fiscal Policy
• Monetary Policy
Monetary Policy is the process by which the monetary authority (central bank) of a country controls the supply of money, often targeting a rate of interest in order to attain a set of objectives oriented towards the growth and stability of the economy.
Monetary policy is typically implemented by a central bank, while fiscal policy decisions are set by the government (mainly the Ministry of Finance). Both policies may be used to influence the performance of the economy in the short run. They are both used to pursue policies of higher economic growth or controlling inflation.
-Monetary Policy involves changing the interest rate and influencing the money supply. On the other hand, Fiscal Policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy.
-Monetary Policy deals with the money supply, lending rates and interest rates and it is often administered by the central bank. On the other hand, Fiscal Policy deals with taxation and government spending and it is often administered by an executive under laws of a legislature.
-Monetary Policy may be more effective in fighting inflation while Fiscal Policy may be more suited to fighting unemployment.
• Types of Monetary Policy
a) Expansionary Monetary Policy: Central banks use expansionary monetary policy to lower unemployment and avoid recession. They lower interest rates, buy securities from member banks and use other tools to increase liquidity in the market.
b) Contractionary Monetary Policy: Central banks use contractionary monetary policy to reduce inflation. They have many tools to do this. The most common are raising interest rates and selling securities through open market operations.
• Goals/Objectives of Monetary Policy
a) Price stability
b) Economic growth and stability
c) Lowering unemployment/Achieving full employment
d) Exchange rate stability
• Instruments of Monetary Policy:
1) Open Market Operation
2) Bank Discount rate/ Bank rate
3) Change in Reserve Requirement Ratio (CRR – SLR)
• Money Market
Money Market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term from several days to just under a year. The money market in Bangladesh is regulated by Bangladesh Bank.
• The instruments of Money Market
(a) Treasury bill, (b) commercial paper, (c) banker‘s acceptance, (d) certificate of deposit, (e) repurchase agreement, (f) short-term treasury notes and bonds, (g) international emergency deposit
• Capital Market
Capital Market is a market for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital (such as retail investors and institutional investors) and users of capital (like businesses, government and individuals). Capital markets are vital to the functioning of an economy since capital is a critical component for generating economic output. The primary segment of capital market is operated through private and public offering of equity and bond instruments. The secondary segment of capital market is institutionalized by 2 stock exchanges — Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). The capital market is governed by Bangladesh Securities and Exchange Commission (BSEC).
• The instruments of Capital Market
a)common stock, (b) preferred stock, (c) mortgage bond, (d) treasury notes and bonds, (e) corporate notes and bonds, (f) government notes and bonds
-The Primary market refers to the market where new securities are issued by the company that wishes to obtain capital and is sold directly to the investor. The secondary market refers to the market where securities that have already been issued are traded. Instruments that are usually traded on the secondary market include stocks, bonds, options, and futures.
-The main difference is that, in the primary market, the company is directly involved in the transaction, whereas in the secondary market, the company has no involvement since the transactions occur between investors.
• Money Market VS Capital Market
-Money markets are for short-term lending and borrowing, and capital markets are for longer periods.
-The forms of securities traded under both markets are different; in money markets, the instruments include treasury bills, certificates of deposit, banker’s acceptances, commercial papers and repo agreements. In capital markets, instruments include stocks and bonds.
-As an individual investor, the best place to invest your money would be in the capital markets, either the primary market or secondary market. In the perspective of a large financial institution or corporation looking for larger funding requirements, the money market would be ideal.
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