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    Major Duties and Responsibilities of Central Bank

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    Uyên Phương
    The document outlines the major duties, functions, and tools of central banks. It discusses how central banks conduct monetary policy, supervise financial institutions, and maintain financial system stability. Central banks define currency, act as lenders of last resort, process payments, and conduct research. They influence money supply, interest rates, and credit availability through tools like open market operations, reserve requirements, and setting the discount rate. The goals of monetary policy include price stability, employment, growth, and maintaining stable interest and exchange rates, though these goals can sometimes conflict.

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    Major Duties and Responsibilities of Central Bank

    Uploaded by

    Uyên Phương
    122 views25 pages
    The document outlines the major duties, functions, and tools of central banks. It discusses how central banks conduct monetary policy, supervise financial institutions, and maintain financial system stability. Central banks define currency, act as lenders of last resort, process payments, and conduct research. They influence money supply, interest rates, and credit availability through tools like open market operations, reserve requirements, and setting the discount rate. The goals of monetary policy include price stability, employment, growth, and maintaining stable interest and exchange rates, though these goals can sometimes conflict.

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    Central Bank Duties

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    The document outlines the major duties, functions, and tools of central banks. It discusses how central banks conduct monetary policy, supervise financial institutions, and maintain financial system stability. Central banks define currency, act as lenders of last resort, process payments, and conduct research. They influence money supply, interest rates, and credit availability through tools like open market operations, reserve requirements, and setting the discount rate. The goals of monetary policy include price stability, employment, growth, and maintaining stable interest and exchange rates, though these goals can sometimes conflict.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    122 views25 pages

    Major Duties and Responsibilities of Central Bank

    Uploaded by

    Uyên Phương
    The document outlines the major duties, functions, and tools of central banks. It discusses how central banks conduct monetary policy, supervise financial institutions, and maintain financial system stability. Central banks define currency, act as lenders of last resort, process payments, and conduct research. They influence money supply, interest rates, and credit availability through tools like open market operations, reserve requirements, and setting the discount rate. The goals of monetary policy include price stability, employment, growth, and maintaining stable interest and exchange rates, though these goals can sometimes conflict.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 25

    Major Duties and Responsibilities of Central Bank

    Conducting monetary policy Supervising and regulating depository institutions Maintaining the stability of the financial system Providing payment and other financial services to the government, the public, FIs and foreign official institutions
    1

    Functions Performed by the Central Banks

    Assistance in the Conduct of Monetary Policy Supervision and Regulation Government Services New Currency Issue Check Clearing Wire Transfer Services Research Services
    2

    Place of Central Bank in the Monetary System


    Central Bank
    Federal Reserve Sytem

    Defines and regulates money supply

    Lender of last Resort

    Facilitates transfer of money through check processing/clearing

    Banking System: 1. Creates money 2. Transfers money 3. Provides financial intermediation 4. Processes/clears checks
    First Bank Other Banks Last Bank
    3

    Balance Sheet of the Federal Reserve (in billions of dollars, 2002)


    Assets Gold and foreign exchange SDR certificates Treasury currency Federal Reserve Float FR loans to domestic banks Security repurchase agreements U.S. Treasury securities U.S. government securities Miscellaneous assets Total assets $ 25.5 2.2 33.2 0.0 0.0 50.3 551..7 0.0 20.3 $683.2 Liabilities and Equity Depository institution reserves $ 17.5 Vault cash of commercial banks 47.3 Deposits due to federal government 7.1 Deposits due to rest of the world 0.1 Currency outside banks 596.2 Miscellaneous liabilities 7.8 FR Bank stock 7.2

    Total liabilities and equity

    $683.2

    Objective of Monetary Policy

    To influence the amount of reserve in the banking system which affects interest rates and availability of credit and ultimately affects the levels of employment, output, prices and inflation

    Money Stock

    There are a number of measures of a nations money stock (M). The narrowest measure is the sum of currency in circulation and the amount of transactions deposits (TD) in the banking system.

    Money Multiplier

    Most nations require that a fraction of transactions deposits be held as reserves. The required fraction is determined by the reserve requirement (rr). This fraction determines the maximum change in the money stock that can result from a change in total reserves.

    Money Multiplier

    Under the assumption that the monetary base is comprised of transactions deposits only, the multiplier is determined by the reserve requirement only. In this case, the money multiplier (m) is equal to 1 divided by the reserve requirement, m = 1/rr.

    Relating the Monetary Base and the Money Stock

    Under the assumptions above, we can write the money stock as the monetary base times the money multiplier. M = mMB = m(C + TR). The change in the money stock is expressed as

    M = m(C + TR).

    Example - BOJ Intervention

    Suppose the Bank of Japan (BOJ) intervenes to strengthen the yen by selling 1 million of US dollar reserves to the private banking system. This action reduces the foreign exchange reserves and total reserves component of the BOJs balance sheet.

    10

    BOJ Balance Sheet

    Assets
    FER -1 million

    Liabilities
    TR -1 million

    Result: R

    1 million, MB

    1 million

    11

    BOJ Intervention

    Because the monetary base declined, so will the money stock. Suppose the reserve requirement is 10 percent. The change in the money stock is M = m(DC + FER), M = (1/.10)(-1 million) = -10 million.

    12

    Monetary Policy Tools


    Open Market Operations
    primary determinate of changes in excess reserves in the banking system impacting the size of the money supply and/or interest rates

    The Discount Rate


    the rate of interest Central Bank charge on emergency loans to depository institutions

    Reserve Requirements
    determine the minimum amount of reserve assets that depository institutions must maintain by law to back transaction deposits held as liabilities
    13

    Tools of Monetary Policy

    Open Market Operations


    To change Reserves To offset other factors affecting Reserves Typically uses repos & reverse repos: Open market transactions to purchase gov. Securities with an aggrement that seller will repurchase them in a predetermined time period. Advantages of Open Market Operations 1. Central Bank has complete control 2. Flexible and precise 3. Easily reversed 4. Implemented quickly
    14

    Open Market Operations Monetary Base = Currency + Reserves

    Open Market Purchase from Bank


    The Banking System Assets Securities - $100 Reserves + $100 Liabilities The Fed Assets Liabilities Securities Reserves + $100 +$100

    Result: R $100, MB $100


    15

    Open Market Operations


    Open Market Purchase from Public Public Assets Liabilities
    Securities - $100 Deposits + $100 Banking System Assets Liabilities Reserves + $100 Deposits + $100

    The Fed Assets


    Liabilities Reserves

    Securities + $100 +$100

    Result: R $100, MB $100


    16

    Discount Rate

    The rate on loans to depository instituions Ambiguous effect on money supply Signalling function: used to send a message to financial markets Lender of Last Resort Function 1. To prevent banking panics 2. To prevent non-bank financial panics
    Moral Hazard Problem
    17

    Discount Loans
    Banking System Assets
    Reserves + $100

    The Fed Assets Liabilities


    Reserves + $100 Discount loan + $100

    Liabilities
    Discount loan + $100

    Result: R $100, MB $100

    18

    Reserve Requirements
    Advantages 1. Powerful effect on money supply Disadvantages 1. Small changes have very large effect on MS 2. Raising reserve requirement ratio causes liquidity problems for banks 3. Frequent changes cause uncertainty for banks

    19

    Goals of Monetary Policy


    Goals 1. Price Stability 2. High Employment 3. Economic Growth 4. Interest Rate Stability 5. Financial Market Stability 6. Foreign Exchange Market Stability Goals often in conflict The primary objective of the Bank shall be to achieve and maintain price stability. Cental Bank of the Republic of Turkey
    20

    A. Price Stability Unanticipated inflation leads to lender losses. Nominal contracts attempt to account for inflation. Effort successful if monetary policy able to maintain steady rate of inflation. B. High Employment The movement of workers between jobs is referred to as frictional unemployment. All unemployment beyond frictional unemployment is classified as unintended unemployment. Reduction in this area is the target of macroeconomic policy. C. Economic Growth Economic growth is enhanced by investment in technological advances in production. Encouragement of savings supplies funds that can be drawn upon for investment. D. Interest Rate and Exchange Rate Stability Volatile interest and exchange rates generate costs to lenders and borrowers. Unexpected changes that cause damage, making policy formulation difficult. E. Conflicts Among Goals Goals frequently cannot be separated from each other and often conflict. Costs must therefore be carefully weighed before policy implementation.

    21

    Impact of Monetary Policy on Various Economic Variables

    Expansionary Activities

    Contractionary Activities

    Impact on Reserves Credit availability Money supply Interest rates Security prices

    22

    Alternative Monetary Policies


    Interest Rate Interest Rate MS MS

    i=8% i*=6% i=4%

    i* = 6% i= 5%

    MD MD MD
    Quantity of Money (in billions)

    MD MD MD
    MS

    Quantity of Money (in billions)

    23

    International Monetary Policies and Strategies

    Foreign Exchange Intervention


    1. Controlled exchange rate regimes under ERBS Programs 2. To stabilize the unstable FX market similar to open market purchases and sales of Treasury securities
    24

    Institutional Framework for a Credible Central Bank

    Independence Accountability

    Transparency

    25

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