CHAPTER ONE

INTRODUCTION

• Background to the Study

The economic and financial situation of a country is largely based on the monetary policy being implemented by the Central Bank of the country. It is widely agreed that monetary policy can contribute to sustainable growth by maintaining price stability. According to Christiano and Fitzgerald (2010), when the rate of inflation is sufficiently low households and businesses do not have to take into account when making everyday decisions on income, expenditure and investment.

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting the rate of interest for the purpose of promoting economic growth and stability. Its official goal is to ensure relatively stable prices and low unemployment. In practice, all types of monetary policy, involve modifying the amount of base currency in circulation. This process of changing the liquidity of base currency through the open sales and purchases of (government-issued) debt and credit instruments is called open market operations. The constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

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