impact of monetary policy on indian economy in the post-reform period

CHAPTER -II
MONETARY THEORY AND POLICY
This chapter is intended to provide the theoretical background <strong>of</strong> the study. It
covers areas such as, role <strong>of</strong> money, <strong>monetary</strong> theories, definition, objectives, targets
and indicators <strong>of</strong> <strong>monetary</strong> <strong>policy</strong>, and a brief overview on the importance <strong>of</strong> <strong>monetary</strong>
<strong>policy</strong> in economic activity.
2.1. ROLE OF MONEY IN ECONOMIC ACTIVITY
Role <strong>of</strong> money in its static form refers to the functions <strong>of</strong> money. In the
dynamic form, money‘s role explains the contributions it can make. To the economic
agents like consumer, producer and distributor, money is the basic concept on which
they play their role. The role <strong>of</strong> money is <strong>of</strong> extra-importance in the way <strong>of</strong> economic
progress <strong>of</strong> a country.
2.1.1. The Narrow and Broad Definitions <strong>of</strong> Money
There has been lot <strong>of</strong> controversy and confusion over the meaning and nature <strong>of</strong>
money. As pointed out by Scitovsky, ―Money is a difficult concept to define, partly
because it fulfils not one but three functions, each <strong>of</strong> them providing a criterion <strong>of</strong>
moneyness….those <strong>of</strong> unit <strong>of</strong> account, a medium <strong>of</strong> exchange, and a store <strong>of</strong> value‖. (1)
Moneyness means liquidity. All things which possess liquidity have moneyness.
Sir John Hicks functionally defines money as ―money is what money does‖. (2)
Some economists define money in legal terms saying that ―anything which the
state declares as money is money.‖ A proper definition <strong>of</strong> money is one which signifies
the various functions performed by it. From this point <strong>of</strong> view Crowther‘s definition
seems to be proper. He says, ―For most purposes money can be defined as anything that
is generally acceptable as a means <strong>of</strong> exchange (i.e. as a means <strong>of</strong> settling debts) and at
the same time acts as a measure and as a store <strong>of</strong> value‖. (3)
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