role of central banks Flashcards
Roles and functions of central banks
- money issuance
- conduct monetary policy
- payment systems and oversights
- lender of last resorts
- banks supervisor
2 implications of monetary stability
- value of money does not fluctuate
- suggests public confidence in the currency
Why is monetary stability important
- low and stable inflation helps consumers and investors make optimum investment and saving decisions
- monetary policy cannot be used to directly stimulate the economy sustainably in the long run
financial stability
It is when the financial system can smoothly, effectively and efficiently allocate capital in the economy
4 functions of central banks (conducting monetary policy)
- money supply
- reserve requirements
- the policy interest rate
- open market operations
What is the central banks connection with money supply
- central bank can directly influence base money, but it is quite difficult to influence money supply
Central bank and reserve requirements policy
central bank can change reserve requirements but frequent adjustments could be costly and traumatic to banks and borrowers
What is policy interest rate
- key monetary policy instrument for modern central banks
- changes in policy interest rate would affect conditions in the money market and serve as a signal for lenders and borrowers
Central bank and open market operations
- these could be used to ensure that the policy interest rate is within target
- they would back up the announcement of a change in policy interest rate.
What is credibility of a central bank
in enhancing credibility, it is essential to make central banks independent of government and give them specific monetary strategies to control inflation.
What three ways does a central bank achieve credibility
- transparency
- disclosure
- accountability
4 reasons for central banks being independent
- free from political pressure
- political business cycle
- used to facilitate financing of large budget deficits
- increases the credibility of central bank
4 reasons against central banks being independent
- difficult to coordinate fiscal and monetary policy
- undemocratic
- unaccountable
- theory of bureaucratic behaviour
What is bureaucratic behaviour for a central bank
the central bank can pursue a course of narrow self-interest to increase its power and prestige the expense of public interest
What is money supply
The money supply is the total amount of cash and cash equivalents, such as savings account balances, circulating in an economy at a given point in time.
What is base money
The monetary base of an economy includes all of the physical paper and coin currency in circulation, plus bank reserves held by the central bank.
What did ‘Blinder’ (2000) quote about credibility of central banks
‘A central bank is credible if people believe it will do what it says’
