Question

Is the monetary policy reaction curve applicable only to central banks that have an explicit inflation target? Explain.

Answer 1

No, the monetary policy reaction curve not only applicable to central banks that have an explicit inflation target. It is applicable on general equilibrium conditions also because monetary policy reaction curve includes.

1. Quantitative instruments , and
2. Qualitative instruments.

QUANTITAIVE INSTRUMENTS includes:

1. Bank rate
2. CRR (cash reserve ratio)
3. SLR (statutory liquidity ratio)
4. Open market operations
5. Repo rate
6. Reverse repo rate

QUALITAIVE INSTRUMENTS INCLUDES:

1. Margin requirement
2. Moral suasion
3. Direct action

So with the help of these instruments any central bank can easily controls the general equilibrium conditions. Some explanations of the above stated instruments explained the general applicability of the instruments on the general equilibrium case.

1. Bank rate- at the time of inflation the bank rate will increase so that it reduces the loan capacity of the people in the market.
2. CRR- cash reserve ratio- it is that minimum reserve which is kept by the commercial bank in the RBI so in the case of inflation this rate will increase so that the lending capacity of the commercial bank will decrease.
3. SLR- statutory liquidity ratio- It is that minimum reserve which is kept by the commercial bank in their own account and in the case of inflation the rate will increase so that it reduces the lending capacity of the commercial banks.