The monetary authority in most countries is called the Central Bank. A central bank does not deal directly with the public like commercial banks such as NCB; it is rather a bank for banks. In Jamaica the central banking function is carried out by the Bank of Jamaica (BOJ). This institution is located in the city of Kingston. The Bank of Jamaica plays a fundamental role in the Jamaican economy.
According to the Bank of Jamaica website, this institution was established in recognition of the need for an appropriately regulated financial structure to encourage the development process as Jamaica was about to embark on the road to political independence and with this it began its operation in 1961 under the Bank of Jamaica Law (1960).
The major responsibility of the BOJ is to ensure monetary and financial system stability which is affirmed in its mission statement: The mission of the Bank of Jamaica is to formulate and implement monetary and regulatory policies to safeguard the value of the domestic currency and to ensure the soundness and development of the financial system by being a strong and efficient organization with highly motivated and professional employees working for the benefit of the people of Jamaica. Under the Bank of Jamaica Act, the functions of the Central Bank are: 1.
To issue and redeem notes and coins. 2. To act as banker to the Government. 3. To act as a bank to the commercial banks 4. To keep and administer the reserves of Jamaica 5. To formulate foreign exchange rate policies 6. To act as advisor on the formulation and implementation of economic policies 7. To influence the volume and conditions of supply of credit so as to promote, the fullest expansion in production, trade and employment, consistent with the maintenance of monetary stability in Jamaica and external value of currency 8.
To foster the development of money and capital markets in Jamaica 9. To supervise commercial bank and other deposit-taking institutions to ensure the soundness of their financial position and protection of depositors. All the functions above all critical to the smooth running of the Jamaican economy but the main function of the BOJ is to design and implement economic policies such as the monetary policy. The Bank of Jamaica is directly responsible for the design and implementation of this policy.
What is Monetary Policy? This refers to the actions taken by a Central Bank to affect financial conditions in the economy, in pursuit of the broader objectives of low price inflation, sustainable growth in real output and high employment. In simple terms, monetary policy refers to actions taken by the central bank to influence the amount of money and credit in the economy. If you look at it, monetary policy has a significant impact on the Jamaican society.
The formulation and implementation of monetary policy involves: managing changes in the money supply, influencing interest rates, influencing the level of credit in the banking system and fostering the development of money and capital markets. This policy has an impact on inflation, interest rates which in turn have an impact on every employed individual’s disposable income. Two important tools which help with monetary policy are: * Open Market Operations
Reserve Requirements Open market operations refers to the purchase and sale of financial instruments while reserve requirements speaks of the portion of deposit liabilities that deposit-taking institutions have to keep on hand, or to hold at the BOJ. Another important policy that the Bank of Jamaica uses is the foreign exchange policy. This policy is aimed at ensuring relative stability in the external value of the local currency.
According to “How the Foreign Exchange Works” by Helen McIntosh, The Bank of Jamaica adopts a threefold approach to the management of the foreign market exchange. It monitors and undertakes the market surveillance, collects data and disseminates information on market activities and acts as a participant in the market as a means of creating orderly conditions. Another important policy that the Bank of Jamaica implements is the Jamaica Debt Exchange programme. This was launched in January 2010.
The initiative aimed to reduce the domestic debt service burden on the central government by exchanging fixed-rate high-interest, short-maturity debt instruments for lower-interest but which still offered domestic investors positive real rates of rates. We know that one of the main roles of the Bank of Jamaica is to issue and redeem notes and coins but can they create money? The answer to this question is yes, they can control money. How do they do this? With reference to the, bank can conduct open market operations.
Open market operations have the effect of giving the banks more reserves or taking reserves away from them, thereby triggering a multiple expansion or contraction of the money supply. Another way that they can create money to increase interest rates, and also by modifying the reserve requirements. In all, the Bank of Jamaica plays an important role in the Jamaican economy. It is the institution that is directly responsible for the monetary policy and it manages money and credit conditions with the objective of keeping inflation low and stable.