StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Role of Central Bank in the Economy - Essay Example

Cite this document
Summary
The paper "Role of Central Bank in the Economy" highlights that the central bank has different roles within developed and developing countries. Besides performing some of its traditional roles, it is also required to undertake modern responsibilities…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.4% of users find it useful
Role of Central Bank in the Economy
Read Text Preview

Extract of sample "Role of Central Bank in the Economy"

number Role of central bank in the economy For a long time, the central bank has been a primary agent for monetarypolicy. It has various functions that lie in the bringing about of financial stability. This is especially important when financial times become difficult and are faced by challenging moments. However, the role and the structures provided by the central bank vary from one country to the other. They are largely dependent on the independent authority and level of responsibility. Picker (64) contends that there are varied circumstances surrounding the development and initiations of central banks all over the world. They all have different origins hence the difference in the roles and functions that they are expected to play. While some of them were established as a special purpose upon which the government banks were brought up to bring about order in the way that bank notes are issued, others were developed to act as sources of funding for the governments (Downes & Vaez-Zadeh 92). There are other central banks that started off as large commercial banks that dominated and subsequently were able to boost the economy by offering the monopoly rights to provide bank notes. Most of the central banks started their operation during the 20th century as central banks that held the public policy agencies to conduct the functions related to central banking. However, the bundles of functions associated with the central bank have always differed in a substantial way from one country to the other. In this paper the main functions and roles of the central banks will be analyzed and an evaluation performed o whether the central banks should be made independent (Touffut 52). Functions towards the economy The key functions of the central bank revolve around the fact that the central bank is an agency that is expected to perform the conducts of monetary policy and provide the means through which it can be settled. In the past, they functioned as the government’s bankers, the monopoly of issuing notes, the banker’s bank, the last resort lender, controller and regulator of credit and the maintenance of external stability (Goodhart xiii). The most important function of the central bank has been linked to the role of financial stability. However, it is considered as the objective that extends or goes beyond the objectives of functions, which contribute towards financial stability. Nonetheless, it is still applicable in many countries where for example in China, it is the role of the People’s bank to ensure that financial risks are mitigated with the effort to provide financial stability (Touffut 10). In spite of this fact, the function that is most widely stated with regard to the central bank is that of the monetary policy (Picker 85). However, in cases where the objectives related to financial responsibilities are wider, the central banks are expected to promote a safe, stable and sound financial system. It can also be defined as the contribution towards financial stability or towards the actions of another organization that pursues financial stability. The other objective that is found within the central bank law is the function of the payment system oversight. This includes the supervision of the smooth operations of the payment and clearing system as well as the making sure that the payment systems are functioning in a proper way. There are trade-offs included among the objectives. In this sense, central banks are faced with the task of enhancing economic growth whilst maintaining stability in these economies. This is especially in the developing countries where they play a major role of developing the banking and financial system due to lack of well established and organized capital and money markets (Touffut 2). Why Central banks should be made independent Banks are a vital component of any government’s economic system. It is only until recently that they were considered to be a very important part of the integral and central policy making machine of a government. Nonetheless, it reached a point where central banks became concerned with targeting issues of inflation. It is because of this that it became important to separate the central bank from the government. They were to be made independent from the political aspect. In this case, the board of directors of the central bank is expected to be selected by the people. Therefore, they can be held accountable to the people for their decisions, their misjudgment and mistakes. Thus, independent central banks are operated within complex and elaborate rules of the creation of money and credit. The control of central banks simply means the control of money, which is the overall symbol that all the activities in the country are under control. Subsequently, the governments will not be in the possession of the kind of power that corrupts due to the lack of their signature. This is because if they are controlled in a political way, the political group that is in charge obtains too much power. In this case, with the risk of a financial crisis in the current times, it can only be hoped that deflation will not be a serious threat (Goodhart xiii). This will help to keep the governments away from inflating the supplies of the market through an automatic mechanism. With this, the country’s balance of payment will be at equilibrium. The making of the central bank independent in most countries in an easier way means the acquisition of confidence. It is related to the monetary policy which if expected to have an impact, then it is important for the central bankers to command their trust from individual citizens. In most countries such as South Africa, New Zealand and Venezuela, a formal constitutional independence has been offered to the central banks from the government’s executive branch. They are thus no longer subservient and mandated to take instructions from the governments. Conclusion The central bank has different roles within the developed and developing countries. Besides performing some of its traditional roles, it is also required to undertake the modern responsibilities. It is these that with the evolving roles influence the economic activity and stability of different economies. Works Cited Downes, Patrick, & Vaez-Zadeh, International Monetary Fund Central Banking Department; Seminar on Central Banking. The evolving role of central banks: papers presented at the 5. Seminar on Central Banking, Washington, DC, November 5-15, 1990. Washington, DC Central Banking Dept., International Monetary Fund, 1991. Print. Goodhart, C. A. E. The Central Bank and the financial system. Cambridge, Mass. : MIT Press,1995. Print. Picker, D. Anne. International economic indicators and central banks. Hoboken, N.J. : Wiley, 2013. Print. Touffut, Jean-Phillippe. Central banks as economic institutions. Cheltenham, UK; Northampton, MA : Edward Elgar, 2008. Print. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Should central banks be independent Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
Should central banks be independent Essay Example | Topics and Well Written Essays - 1000 words. Retrieved from https://studentshare.org/marketing/1635882-should-central-banks-be-independent
(Should Central Banks Be Independent Essay Example | Topics and Well Written Essays - 1000 Words)
Should Central Banks Be Independent Essay Example | Topics and Well Written Essays - 1000 Words. https://studentshare.org/marketing/1635882-should-central-banks-be-independent.
“Should Central Banks Be Independent Essay Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/marketing/1635882-should-central-banks-be-independent.
  • Cited: 0 times

CHECK THESE SAMPLES OF Role of Central Bank in the Economy

Central bank independence and economic performance

This paper offers a comprehensive analysis of the role of central bank in terms of economic performance of the nation.... The role of central bank Central bank's monetary policies have different impact on different economic variables of the economy.... Increase in money supply with or without decrease in interest rates could trigger inflation in the economy.... n order to achieve economic growth in a country, formation of capital is essential for fresh investments in the economy....
6 Pages (1500 words) Assignment

Forming a Central Bank in the Gulf Region

GCC central Bank Contents Executive Summary 3 Introduction 3 Discussion 4 Recommended Structure of the Central Bank for GCC 4 Comparison between GCC Central Bank & European Central Bank 5 Arguments for GCC Central Bank 6 Objectives and functions for GCC central Bank 7 Conclusion 8 References 9 Executive Summary The project discusses the proposal of forming a central bank in the Gulf region that regulates the economy of the Gulf member countries.... The formation of the Central Bank includes a study of the probable form or structure of the central bank in GCC....
6 Pages (1500 words) Assignment

Role of Central Banks

It is however an important factor in helping to encourage long-term stability in the economy.... The central bank ensures that the money supply in the economy is exogenous and determines the monetary base accordingly for the actual values of the currency and reserve ratios etc.... Under this procedure, the central bank sets the discount rate to achieve a certain level of aggregate demand in the economy and lets the financial sector determine the monetary base through borrowing or discounting bonds with it....
11 Pages (2750 words) Essay

Key Roles of the Central Bank

Countries have one chief institution that deals with regulations and flow of money, which is crucial in the economy.... The modern precursor of central bank was the bank of Sweden, the Sveriges Riksbank, which acted as the source of funding for government operations and was answerable to the political leadership.... Government's hand in economy is thus felt by the central institution that The institution, which is the chief regulator, is called the central bank....
13 Pages (3250 words) Essay

The Key Roles of the Central Bank in an Economy

A paper "The Key Roles of the central bank in an Economy" reports that the accessibility to the intermediation market was highly regulated.... The following explains the roles of central bank of different countries.... The central bank is mandated to conduct different functions.... Recently, the oversight function has been changed to other agencies from the central bank.... It is the defining characteristics of the central bank....
9 Pages (2250 words) Assignment

The Key Roles of Central Bank

There exist different arguments on the involvement of the central bank in some economic and financial areas.... This paper "The Key Roles of central bank" focuses on the fact that the central bank plays a major role in stabilizing an economy.... For an economy to achieve economic development there has to be financial stability otherwise, the economy will become fragile, reduce an agent's confidence, and cause moral hazards.... There are different macroeconomic instruments that the central bank can implement to affect the economic state of a nation....
9 Pages (2250 words) Assignment

Central Bank and Depository Institutions

The central bank also supervises the banking system of commercial banks that do function in its economy so as to monitor the money supply in the economy. ... Depository institutions are also regulated by the central bank in a number of ways so as to manage the money supply in the economy.... The regulation of currency by the central bank.... The central bank enjoys supervisory controls over other financial institutions.... They are also obligated by the central bank to conserve the reserve prerequisite as specified....
5 Pages (1250 words) Essay

The Role of Central Banks in Economics

This is in order to enhance sustained economic growth and development across different sectors in the economy.... entral banks and commercial banks play distinct roles in the economy.... Before the central banks issue notes and coins, it must fulfill certain requirements to avoid inflation, currency devaluations and a shortage of money in the economy among others.... The paper "The role of central Banks in Economics" highlights that commercial banks are financial institutions that offer financial and other services to the public....
17 Pages (4250 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us