The central bank, through its promotional role, develops the necessary banking infrastructure. The main objective of monetary policy of an underdeveloped country is to achieve the high level of economic growth: For this purpose, the main objectives of monetary policy of a developing country should be as follows- 2009, Beck 2011). 1. Monetary policy refers to the adoption of suitable policy regarding interest rate and the availability of credit. 3. The monetary policy has the limited scope in the underdeveloped countries because of the following reasons Using the International Financial Statistics dataset published by the IMF, I test for the impact of the monetary policy instrument, the central bank’s nominal interest rate, on They do not have adequate institutions to meet the genuine needs of trade and industry. 1. Monetary policy transmission, for instance, is hindered by weaknesses in the legal environment, underdeveloped This question is particularly pressing for developing countries, where the channels of monetary policy are impeded by financial underdevelopment and weak institutions (Beck et al. The purpose is to mobilize savings for financing development plans. Introduction. Additional Physical Format: Online version: Sethi, J.D. In the developed countries, the role of fiscal polity is to promote fall employment without Inflation through its spending and taxing powers. The ability of monetary policy to influence credit and the real economy is of central concern to policymakers and academics. In developing countries, institutional constraints hamper financial intermediation and public policy effectiveness (Beck et al., 2000; Levine et al., 2000).Monetary policy transmission, for instance, is hindered by weaknesses in the legal environment, underdeveloped financial markets, and concentrated banking systems (Mishra et al., 2014). Topics covered include financial development and economic growth in underdeveloped countries; instruments and techniques used in the implementation of monetary policy: and econometric policy models. Above all, the growth objective of monetary policy in underdeveloped countries implies the promotional role of monetary authorities. In developing countries, institutional constraints hamper financial intermediation and public pol-icy effectiveness (Beck, Levine and Loayza, 2000; Levine, Loayza and Beck, 2000). Limitations of Monetary Policy in Developing Economy (i) Underdeveloped Money and Capital Market. In what follows, we explain the role and limitations of monetary policy in controlling with special reference to India. Underdeveloped countries do not have well developed and fully organized money and capital market. Chacholiades, M. (1978) International Monetary Theory and Policy, McGraw–Hill, USA Google Scholar Chandavarkar, A. G. (1971) ‘Some Aspect of Interest Rate Policies in Less Developed Economies: The Experience in Selected Asian Countries’, IMF Staff Papers , 18 , 1 CrossRef Google Scholar Monetary policy is an important tool of demand management in the economy and therefore of checking inflation. In most underdeveloped countries, the banking system is underdeveloped. Main Objectives of Monetary Policy in Underdeveloped Countries. The developed countries largely satisfy all the necessary prerequisites for the efficient functioning of the monetary policy, whereas the developing or underdeveloped economies normally lack these requirements. (Jai Dev), Problems of monetary policy in an underdeveloped country. Role of Fiscal Policy: The role of fiscal policy in less developed countries differs from that in developed countries. ADVERTISEMENTS: The experience of underdeveloped countries reveals that monetary policy plays a limited role in such countries: The following arguments are given in support of this view. The central bank cannot effectively implement the various credit control measures in the absence of well-organized money and capital markets. Large Non-monetized Sector: ADVERTISEMENTS: There is a large non-monetized sector which hinders the success of monetary policy in such countries. monetary policy effectiveness of less developed economies using a panel of underdeveloped and developing countries. Whereas the position of the developing countries … New York: Asia Pub. 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