Mongolian financial sector grew from centrally planned, single bank system to today's free market system.
The role of money is critical in effective functioning of economic activities. Within its main objective of monetary policy, Bank of Mongolia shall promote balanced and sustained development of the national economy through maintaining the stability of national currency, the togrog, and keeping inflation at sustained low level.
The objective of ensuring sustained low levels of inflation (regarded as the concept of price stability) will lead to a wide range of objectives that are aimed at bringing the country to its sustainable economic growth path.
According to the Law on the Central Bank, it is stated that “The main objective of Bank of Mongolia is to sustain stability of national currency tugrug” and this statement can be interpreted in two manners. For instance, stability of tugrug in the external market refers to the stability of exchange rate of tugrug in foreign currencies, whereas stability of tugrug in domestic market refers to the stability of Consumer Price Index.
At present, the main objectives of most central banks are focused at sustaining price stability. Study conducted at international levels has concluded that per capita GDP declines as number of central bank objectives (besides price stability) increases.
Changes in monetary policy instruments have time lagged influence on inflation. For Mongolian case, this time lag is found to be around 1 year. Moreover, since the mid 2000’s correlation between money supply and inflation has declined, hence the need to reform the monetary policy method has emerged.
Under this condition, the action of Parliament in changing targeted inflation rate each year is causing to diminish the time frame that monetary policy instrument starts to take effect, to miss inflation target from the beginning, to lose central bank independence and hence to reduce the credibility of the central bank.
As a solution to the above mentioned hindrances, Bank of Mongolia had proposed to the Parliament in the project of “Monetary Policy Guidelines for 2008” to set targeted inflation rate at 6 percent on average during the years 2008-2010.
