Central banks are amongst the most important players in financial markets worldwide. Central banks (reserve banks) are government authorities in charge of monetary policy. The actions of Central Banks affect interest rates, the amount of credit and the supply of money all which impacts not only financial markets but also the aggregate output and inflation. The essay that follows discusses the various roles of the Central Banks in the economy and further elaborates on why economists argue about their independence.
ROLES, ACTIVITIES AND RESPONSIBILITIES
IMPLEMENTING MONETARY POLICIES
The most important goal of the Central Banks monetary policy is ‘price stability’ which basically means low and stable inflation. Other goals of monetary policy also includes. High employment which is important due to the fact that the alternate situation, ‘unemployment’ causes too much human misery. Economic growth is closely related to the high unemployment goal because businesses are more likely to invest in capital equipment to increase productivity and economic growth. When your employment is low it is harder to plan for the future (Mishkin, 2009). Stability in the foreign exchange market is important as international trade is increasing and the value of domestic currency of a country relative to other foreign currencies has been the major considerations for the central bank (Jayaraman, 2014 (EC301 Study Guide)). Other further roles of Central Banks include:
Controlling the entire nation’s money supply.
Issuing New Currency.
Withdrawing damaged currency from circulation.
Regulating and supervising the banking industry.
Using their staff of professional economists to research topics related to conduct of monetary policy. ECONOMISTS ARGUMENT ABOUT INDEPENDENCE OF CENTRAL BANKS
There are two (2) types of independences of Central Banks. Firstly is the instrument independence, which is the ability of the Central Banks to set monetary policy...
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