...Role of the Central Banks and their involvement with Government Fiscal Policy Introduction: The central bank is the public sector bank of a country which owned by the government and not by the private sector. It is responsible for major financial, economic status of a country. It is also responsible for various policies that control the economic situation of a county which includes the monetary and the fiscal policy which are intended to run a country with at a stable state of economy. The central bank has also has the responsibility for the issue of currency and also holds hold deposit it for other private sector banks. Examples of Central banks: The bank of Canada, Federal reserve, European central bank, the bank of England, The reserve bank of India etc. The Roles: Different central banks have some different goals but most of them have common goals. The major roles are setting up and marinating a monetary policy, fiscal policy and bank notes. These policies are created to maintain stability in an economy. Following the policy will intern takes its responsibility towards the next level by taking responsibility in maintaining price stability in an economy; it acts as the bank for the government. The central bank is the lender of loss resort and it controls the supply of money and taxation policies in an economy. It is responsible to monitor the banking system of the country. It controls the interest rates by buying selling of bonds, it also watches over the cash reserve...
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...Should the central bank play some role in bursting asset bubbles? This is a contentious issue that has been discussed for a long time. Some argue in favor of the view that central banks should burst bubbles. But, in their view, monetary policy should respond to asset bubbles in a cautious and moderate manner in order to avoid economic distortions. Some others argue against the role of central bank in bursting bubbles. They say bubbles generally arise out of some combination of irrational exuberance, jumps forward in technology and financial deregulation, for which the connection between monetary conditions and the rise of bubbles is tenuous. However, the central bank is at the centre point in this debate. The recent crash in the stock market in Bangladesh is also associated with some policies of the central bank. The aim of this article is to analyse the following two aspects: (i) whether the monetary policy response was appropriate to the rise and the recent collapse of the bubble, and (ii) whether the behaviour of financial institutions was optimal to the policy response. Commercial banks have been involved heavily in the stock market business in the last few years. Allowing merchant banking has exaggerated the situation. They became the key player in the stock market. Undoubtedly, any policies to control banks' exposure to the stock market could have significant impact on the capital market. Monetary easing during last two or more years (money supply was more than 22 percent...
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...Boyadjian • Sahag-Grag Pailian • Shant Kupjian • Outline: * Introduction * The European Central Bank (ECB) * Body * Summary of the Article * Analysis * Monetary Policy of the ECB * Interest Rate * The Impact of Interest Rate on: * Inflation * Liquidity * Gross Domestic Product (GDP) * Unemployment * How to Ease the Liquidity * Print more Euros (€) * ECB Buying of Government Bonds * New Governmental Institutions * Decrease of Reserve Requirements * ECB Buying Corporate Bonds * Recommendations * Bibliography Introduction: The European Central Bank (ECB): The European central bank was formed in Frankfurt, Germany in 1988. The ECB is responsible for the monetary system of the euro currency and it consists of 17 European countries. The European central bank works with the other national banks of each of the European Union members to formulate monetary policy that helps maintain the euro’s purchasing power. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things. The European central bank and the national central banks constitute the Euro system, the central banking system and the monetary authority of the euro area. The main objective of the Euro system is to...
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...The Role of Central Banks We operate today in modern advanced economies which rely on a system of fiat money. The agency that controls this system is known as a central bank. A central bank has the power to increase and decrease the amount of currency made available in an economy. Furthermore, the set of actions that make this possible is called the monetary policy and there are different tools that central banks use to operate a stable economy. The two agencies which control the European monetary policy are called the European Central Bank and the Bank of England. In US, the central bank is called the Federal Reserve. This essay will provide fact and information to what extent central banks control our economy. Initially, central banks are important institutions of our advanced modern economy. Changes in the money supply can affect our economy when it comes to rate of inflation, unemployment, prices and production of goods. Because of the link between the amount of money in an economy and the inflation rate, central banks will act as a price guardian. Their policy is to keep the inflation rate as close to the inflation target as possible. For that reason, central banks are able to increase and decrease the available currency in an economy. Therefore, central banks should be seen as a guardian of inflation stability, rather than a guardian of price stability. There are several tools that central banks use to fulfil their role as a guardian of inflation stability to control...
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...The New Central Bank Act (RA 7653) CHAPTER V FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNMENT ARTICLE II - THE MARKETING AND STABILIZATION OF SECURITIES FOR THE ACCOUNT OF THE GOVERNMENT A. THE ISSUE AND PLACING OF GOVERNMENT SECURITIES SECTION 117. Issue of Government Obligations. — The issue of securities representing obligations of the Government, its political subdivisions or instrumentalities, may be made through the Bangko Sentral, which may act as agent of, and for the account of, the Government or its respective subdivisions or instrumentality, as the case may be: Provided, however, That the Bangko Sentral shall not guarantee the placement of said securities, and shall not subscribe to their issue except to replace its maturing holdings of securities with the same type as the maturing securities. 117.1 Legislative History This is taken from Section 122 of Republic Act No. 265, with modification. Under RA No. 265, the issue of government securities by the Central Bank as fiscal agent of the Government was mandatory. In contrast, the use of the word “may” in Republic Act No, 7653 shows the intent to make the issue of such securities merely permissive and non-exclusive to the Bangko Sentral. ARTICLE II – REPUBLIC ACT NO. 265 CENTRAL BANK ACT OF 1948 Section 122. Issue of Government obligations. – The issue of securities representing obligations of the Government, its political subdivisions or instrumentalities, shall be made through the Central Bank...
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...Supervision of the banking system: Central bank supervises the banking system of the country. Central may be responsible for banking system. They collect information from commercial bank and take necessary decision by two ways- a) bank examine and b) bank regulation 2. Advising the government on monetary policy: The decision on monetary policy may be taken by the central bank. Monetary policy refers to interest rates and money supply. The central bank will corporate with the government on economic policy generally and will produce advice on monetary policy and economic matters, including all the statistics. 3. Issue of banknotes: The central bank controls the issue of banknotes and coins. Most payment these day do not involve cash but cheques, standing order, direct debit, credit cards and so on. Nevertheless, cash is important as bank's cash holdings are a constraint on creation of credit, as we have seen. 4. Acting as banker to other banks: The Central bank will act as banker to the other banks in the country. As well as holding accounts with international bodies like IMF World bank. It is a common habit for the central bank to insist that the other banks hold non-interest bearing reserves with in proportion to their deposit. 5. Acting as banker to government: Normally a central bank acts as the government's banker. It receives revenues for Taxes and other income and pay out money for t6he government's expenditure. Usually, it will not lend to the government...
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...Name: Ogayo Julius Muga Diploma in Business Management University of Nairobi BANKING & INSURANCE CENTRAL BANK A central Bank is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. The central bank often also oversees the commercial Banking system within its country. A central Bank is distinguished from a normal commercial bank because it has a monopoly and creating the currency of that nation, which is usually that Nations legal tender. Central Bank of Kenya is the highest Banking institution in the country and responsible for ensuring the smooth working of banking sector and other financial institutions. Central Bank differs from commercial banks in that it does not engage in ordinary banking activities e.g. accepting deposits from the general public. It is owned by the government while commercial banks are owned by shareholders. CBK usually implements certain government policies. OBJECTIVES OF CENTRAL BANK OF KENYA i. To formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices. ii. The Bank fosters the liquidity, solvency and proper functions of a stable market based financial system. iii. Support the economic policy of the government including its objectives for growth and employment. iv. Formulate and implement foreign exchange policy v. Hold and manage its foreign exchange reserves. vi. License and...
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...Determinants of Central Bank Independence I. Introduction “In framing a government that is administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place, oblige it to control itself…” – James Madison Among policy sciences, Central Bank Independence (CBI) holds a considerable repute as a credibility enhancing mechanism in the conduct of monetary policy. In general, CBI is defined as the freedom to conduct monetary policy without direct government or political interference (Walsh, 2005). It is conventionally believed that CBI is an effective means of inflation management. A plethora of empirical and theoretical studies have shown that CBI reforms helped reduced inflationary bias due to time-inconsistency problems inherent in monetary policy and made the inflationary rule credible. This consensus has consequently led to a significant number of governments to initiate CBI reforms granting their respective central banks more independence in an effort to insulate monetary policy from political opportunism. Since New Zealand granted its central bank independence through the implementation of Reserve Bank Act of 1989, several countries have followed suit. Dauntfeld et. al. (2008) identified 89 countries that implemented CBI reforms for the period 1980-2005. While the trend towards CBI has increased, there still exists a significant variation in the degree of independence granted central banks across...
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...Central banks are under increasing scrutiny over their performance, their costs and the extent to which they employ modern management practices. Yet while performance management techniques are widespread in the commercial sector, it is difficult to apply these directly to central banks. This article begins by setting out what is involved in performance management and discusses some of the problems that occur in applying them to central banking. In a second section, some examples of best-practice activities in performance management are considered. It is hoped that this will open a debate about performance management - a debate to which all central banks are invited to contribute1. Performance management in modern organisations is concerned with outcomes (results), outputs (products) and inputs (activities) in that order. It should be concerned with improving the efficiency and effectiveness of the conversion processes between each level of the orgnaisation, and it needs to take account of the degree to which the organisation is conditioned by, or able to control, its environment in seeking to achieve its objectives. What then are the problems with applying performance measurement to central banks? This article groups them into three. First, central banks have to satisfy multiple stakeholders, outcomes and outputs; second, perverse results can arise from pursuing some measures at the expense of others; and third, there are few comparators to turn to for guidance. From a...
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...Main Objective of the Central Bank of The Republic of turkey (CBRT) Price Stability Article 4- (As amended by Law No. 4651 of April 25, 2001) "The primary objective of the Bank shall be to achieve and maintain price stability. The Bank shall determine on its own discretion the monetary policy that it shall implement and the monetary policy instruments that it is going to use in order to achieve and maintain price stability. The Bank shall, provided that it shall not be in confliction with the objective of achieving and maintaining price stability, support the growth and employment policies of the Government.“ Price stability denotes a level of sustainable inflation low enough that economic agents may ignore it in their investment, consumption and saving decisions. The largest contribution that the Central Bank has made and can make to strong, stable and sustainable growth and increased employment is to achieve and maintain price stability. Inflation Targeting Regime In 2002, the Central Bank adopted a modern monetary policy strategy, namely the “inflation targeting regime”. During the implementation of the implicit inflation targeting regime of the 2002–2005 period, the Bank tried to lay the basis for the regime by ensuring the necessary pre-conditions, strengthened its technical and institutional infrastructure, developed estimation models and expanded its data set. During this process, the Research Department was restructured as the Research and...
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...WHY BITCOIN IS THREAT FOR CENTRAL BANK ! Being able to avoid bank fees by transacting outside of the banking system was the most attractive thing for its users. Being able to avoid bank fees by transacting outside of the banking system was the most attractive thing for its users but not for banks ! After beeing lunched in 2009 , Bitcoin, this year, has achieved his highest value. The currency is not controlled by a central bank or government. Bitcoin is used to make peer-to-peer payments and there are around 11 million bitcoins in circulation. People form all around the world started to invest and use bitcoins after loosing coinfidence in complete banking sistem. The price of Bitcoin incresed from just few dollars in 2009 to almost 900 US dollars today, and it’s still raising. But bitcoin price didn’t just rise. It had breakdown in where bitcoin creshed for more than houndred dollars in one day, but soon it rised again and reached soon todays price. Being able to avoid bank fees by transacting outside of the banking system was the most attractive thing for its users. Being able to avoid bank fees by transacting outside of the banking system was the most attractive thing for its users that interest in Bitcoin is heating up, Blockchain, the main transaction ledger for the digital currency, says it has created its millionth bitcoin "wallet" . Just three months ago the number of wallets stood at 500,000. While this is not an exact measure of the number of users...
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...are the roles and functions of central banks? Why do they need Economic staff? How far should central banks get involved in data collection and areas such as seasonal adjustment, as well as economic analysis? Introduction Though Central Bank is viewed as one of the primary mechanisms of macroeconomic stabilization there are a number of arguments about other areas of Central Bank’s involvement. This paper will explore the different areas, including the role of Central Bank in effecting monetary policy and intervening body in exchange rate trades, Central Bank as a Last Lender Resort (LLR), and Central Bank as a regulatory body of the financial sector. Prior to further discussion, it is important to stress that the role of Central Bank and the scope of its involvement may vary due to the effect of different legislations and the presence of various stakeholders. Thus, US Central Bank does not act as a regulatory body of the financial sector (Driffill et al., 2005), whereas the intervention activity of Japan Central Bank requires the approval of other governmental bodies (Fujiwara, 2005). This paper discusses the importance of Central Bank's publications of economic forecasts and other information related to Central Bank's views of the further state of macroeconomic trends. The discussion shows that this information is highly important for other market players and forecasting agencies as it reduces the information asymmetry. The role of Central bank in macroeconomic stabilization ...
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...FRANKFURT—Five major central banks moved in concert Thursday to pump dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis. European banks are moving to pump dollars into their banking system, as panic starts to seep in over how to prevent a sovereign debt crisis, David Wessel and Charles Forelle report on Markets Hub. (Photo: AFP/ Getty Images.) The European Central Bank said it will be joined by the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three U.S. dollar liquidity-providing operations. The action addresses an acute shortage of dollar availability as U.S. lenders withhold funds out of concern that the European banking system is overexposed to the region's government-debt crisis. The tenders appear aimed above all at ensuring that European banks keep access to dollar funding, after months in which private-sector investors have refused to roll over existing credits. In the new tenders, banks bidding, say, at the ECB for funds, will receive dollars. But the Fed's actual counterparty will be the ECB, not the banks that use the facility, reducing the risks of the transaction for the Fed. [centrals0915] Agence France-Presse/Getty Images European Central Bank headquarters in Frankfurt. The euro surged by more than 1% against the dollar and the yen following the central banks' move. European equity markets also shot higher...
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...Concordia University – School of Management MBA – 506 The Euro in Crisis: Decision Time at the European Central Bank LaRisha Baker Professor: Tom DiCorcia November 30th, 2014 Introduction The European Central Bank (ECB) is the central bank for Europe's single currency, the euro. Its main task is to maintain the euro's purchasing power and maintain price stability in the euro area. The euro area comprises of 18 European Union (EU) countries, of which Greece is included (European Central Bank, n.d.). As the EBC holds extraordinary decision-making power, this will in effect have an impact on the financial economy of Greece. From this case analysis, the ECB must decide whether to purchase or to not purchase Greek sovereign debt (Trumbull, Roscini & Choi, 2011). The Problem After the sub-prime mortgage burst in the United States, this sent reverberating shock waves throughout world economies. As the US economy tightened, economies around the world were also affected; adversely affected highly leveraged banks in the Eurozone. Though providing financial bailouts were against the Eurozone philosophy, with fear looming that Greece would default on its debt, this put pressure on Eurozone members to intervene (Trumbull, Roscini & Choi, 2011). For the euro to maintain stability, a bailout for Greece was imminent. If no Greek bailout were made available, this could potentially upset the stability of the entire EU and the euro. The ECB had been slow to act, in part...
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...Introduction During recent decades, inflation targeting has become one of the most significant developments in both the theory and the practice of monetary policy. An increasing number of central banks around the world have adopted this strategy as the basic framework governing their respective monetary policies (Friedman, 2004). As this trend has become hot, however, problems arises. A question worth discussing derives from those problems is that how to evaluate the monetary policy conducted by an inflation-targeting central bank. There is a view that the evaluation should not base on simply comparing the actual values for inflation with the inflation target. The reasons for this opinion is quite obvious: first, no central bank has complete control over inflation; second, in practice all central banks also care about stabilising economic activity. In the following sections of this essay, we will first consider the central bank’s responses to a temporary demand shock in detail, and then the case of an inflation shock. A conclusion will be given at the end. A temporary demand shock Assume that there are no productivity or inflation shocks (at=ut=0), and a demand gt shock with persistence µ < 1 takes place at time 0. The natural real interest rate is given by rtn=r+φ-1gt. Substitute MPR into IS curve with the information above, and then use the method of undetermined coefficients, we can have: xt=bggt bg>0 πt-π=cggt cg>0 With the two coefficients...
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