Central banks, monetary policy, responsibility
Most of central banks presume that financial stability has policy responsibility. In a few situations where the central bank is faced with legal objective that is explicit for stability in finance, objective is of a wide range and the responsibility of central banks far reaching. However, in other situations where there are well set objectives for functions of financial stability, the language's implication is an extent of results responsibility, with these banks charged with stable, safe or sound system of finance. Making a financial stability specific entails confrontation of issues discussed relating them to objectives of monetary policy. It is not an objective that is absolute- financial stability is always flexible. The extent is what varies. There is no standard way to the measurement of financial stability, and this complicates its intention, and if achievement of appropriate sum is reached (Callaghan, 2009). Tradeoffs are to be taken into account.
It entails dynamic and allocative efficiency of intermediation of finance. Secondly, there is another that entails potential incompatibility compared to other objective policy. Separate from being a last resort lender, up to date there are no instruments of monetary policy that is suitable for the role of safeguarding stability in finance. The instruments in charge of this role have got other tasks, which are inclusive of money stability interest rates; regulation of finance for efficiency of the market and micro stability and institutional; and micro soundness or institutional prudential supervision. Diversion of those instruments from the basic purpose entails unintended consequences risk and trade off. Recent events sufficiently illustrate these issues.
[...] The deposits can be converted to the currency. Both the deposits and currency add up to the monetary base that is a liability to Fed in its monetary unit. Often, some banks put base money into use as a partial reserve and extend money supply circulation with a big amount. Reserve Requirement Bank control on monetary control is done by authorities. Implementation of monetary policy can be done by change of proportions of the assets commercial banks should hold as reserves with the Fed. [...]
[...] Many a time's central banks are externally focused to take into account efficiency of the economy in their acts. But the directions to take into account efficiency do not clarify wholly the intended action, in any case, they are challenged by a trade-off. The extent of stability and trade-off remains open. When financial and monetary stability objectives clash, laws of many central banks go silent on the way of balancing arising risks from trade-offs. Partially, the silence stands for inadequate knowledge of involved underlying mechanisms. [...]
[...] The main link is how the expected real balances relate with the actual ones. Classical economists believe that the main reason for holding money is for transaction reasons. Therefore, assuming the economy operates at full employment, the household would have preferred constant amount of the real balance. As the supply of money is assumed to be external, at price levels that exist, the supply of money dictates actual real balances. The velocity with which people spend creates the differences on money held. [...]
[...] The central banks or finance ministry carry out this function. The central bank in particular is vested with the responsibility of printing currency and releasing the currency to the economy or withdrawal of the currency from the economy via transactions of the open market. Central banks are capable of manipulating activities of the bank by changing rates of interest and changing reserve bank requirements. Money base is referred to as high powered as it increases results into bank money increase in a larger degree. [...]
[...] This changes money supply. The central banks do not affect reserve requirement. This is because there are volatile changes that are volatile in supply of money because of lending multiplier. Window Lending Window lending in discounts is where banks, institution of depositories, have the ability for reserve borrowing from the central bank at a rate of discount. Usually, this rate is set below T bills. This allows variation of credit conditions by institutions; hence affect the supply of money. This is the only instrument that the central banks do not have control over. [...]
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