Monetary Policy Implementation

Monetary policy is operated in several channels. Most important are

  • banking systems
  • financial markets
  • exchange rates

In India major monetary policy channel is banking channel, that is why India often regulates Cash Reserve Ratio(CRR).

In banking systems, leverage ratios play prominent role. More on leverage ratios is blogged under financial accounting

leverage ratio = (debt/assets)/(capital/equity)

When a bank’s equity is very low, even a small shock/recession will make the banks bankrupt.

We will discuss more about exchange rates in further posts.

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