Monetary policy Review Example

The subject of the paper is the review of basic terms of Central Bank, it’s monetary policy and issues facing Central Banks. The evolution of central banks as key players in economic affairs has a colorful history embodying over two centuries of economic and political thought. Central bank supervises and regulated the banking system and the whole financial sector. The primary function of a central bank is to provide the nation’s money supply, but more active duties include controlling interest rates and acting as a lender of last resort to the banking sector during times of financial crisis.

It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. The topicality of the Chosen Problem From humble beginnings in the seventeenth century, central banks have risen to be at the apex of the financial institutional structure of national economies. They are pre-eminent in the conduct of monetary policy and play a dominant role in ensuring financial stability.

Increasingly, the functions of central banks are taking on an international perspective, as a result of the growing integration of financial markets. Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Most countries have a central bank that provides financial services to the government and to the overall stability of the financial system. The aims of the Study.

The aims of the Paper work are to investigate and describe basic terms, financial instruments of Central Banking. In addition the goal is to consider such concepts as monetary policy and the issues facing Central Banks. Methods and materials of study In the research of Central Banking have been used articles and research papers of Russian and foreign scientists and also the statistical data published on official sites of Central Banks and in various economic magazines. The essence of the diploma.

A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. In the last twenty years the profile of central banks has risen considerably as monetary policy has taken over from fiscal policy, as the principal tool of economic management. With this transition central banks have moved on from being lenders of last resort to assuming the role of guardians of price stability. This has placed central banks, and their governors, firmly in the driver’s seat of economic policy-making.

Functions of a central bank may include: implementing monetary policy, determining Interest rates, controlling the nation’s entire money supply, regulating and supervising the banking industry, setting the official interest rate – used to manage both inflation and the country’s exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms Central banks implement a country’s chosen monetary policy. At the most basic level, this involves establishing what form of currency the country may have.

The main monetary policy instruments available to central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount (including using the term repurchase market), and credit policy (often coordinated with trade policy). While capital adequacy is important, it is defined and regulated by the Bank for International Settlements, and central banks in practice generally do not apply stricter rules. In many countries, the central bank may use another country’s currency either directly (in a currency union), or indirectly, by using a currency board.

In the latter case, local currency is directly backed by the central bank’s holdings of a foreign currency in a fixed-ratio; this mechanism is used, notably, in Bulgaria, Hong Kong and Estonia. In countries with fiat money, monetary policy may be used as a shorthand form for the interest rate targets and other active measures undertaken by the monetary authority. The nature and structure of central bank ownership is of interest because of the actual or perceived level of political influence it may afford the government over the conduct of monetary policy.

Central banks in many countries are state-owned institutions and operate under legislation similar to that of other government bodies. Central banking can be a very profitable business and therefore ownership can reap considerable economic rent. Profits from functions and activities of central banks, such as seignior age, open market operations, and fees, are distributed in accordance with ownership structure. In the case of state-owned central banks, profits go to the state based on a formula or budget, or to the Finance Minister or the Treasury.

This is even true for the Fed, for despite the appearance of private ownership, on average 95% of the Fed’s considerable profit, goes to the US Treasury. Central banks have a long history of adaptation that continues today with vigorous debate over fundamental issues like, the tasks central banks should perform, the level of independence they ought to enjoy, how accountability can be best achieved, and the related issue of openness and transparency, especially in the conduct of monetary policy.

The debate is essentially concerned with finding optimal governance and operational structures that allow a central bank to most efficiently achieve its mandated goals (e. g. price stability, stable financial system) within a democratic society. Conclusion The paper conclude the most important aspects of Central Banking, It’s functions and issues. The big analysis of all bank system as a whole including central bank has been carried out.

The author have been found that goals of monetary policy are price stability, high employment, economic growth, interest rate stability, financial market stability, currency issuance etc. There are also a lot of functions of a Central Bank, such as: implementing monetary policy, determining interest rates, controlling the nation’s entire money supply, regulating and supervising the banking industry, etc. The various points of view on problems are considered. It is possible to make a realistic conclusion that certainly, central banks play the major role in formation of all economic system as a whole.

Their role is irreplaceable. Always it is necessary to remember that the central banks are the main tools of development in financial sphere. And each of us is a part of it. List of references Internet Sites 1. Asian Development Bank www. adb. org 2. Bank for International Settlements www. bis. org 3. International Monetary Fund www. imf. org 4. World Bank www. worldbank. org Selected References 1. Alesina, A. and L. H. Summers. “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence”, Journal of Money, Credit and Banking, Volume 25, Number 2, pp. 151-162.

2. Archer, D. , A. Brooks and M. Reddell. (1999) “A Cash Rate System For Implementing Monetary Policy”, Reserve Bank of New Zealand: Bulletin, Volume 62, Number 1, pp. 51-61. 3. Barth, J. R. , G. Caprio Jr. and R. Levine. (Forthcoming) ‘Bank Regulation and Supervision: What Works Best? ’, Journal of Financial Intermediation. 4. Berger, H. , J. de Haan and S. Eijffinger. (2001) “Central Bank Independence: An Update of Theory and Evidence”, Journal of Economic Surveys, Volume 15, Number 1, pp. 3-40. Blinder, A. S. Central Banking in Theory and Practice MIT Press, Cambridge, Mass.