The Role of the Central Bank

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The role of the central bank

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The Role of the Central Bank

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Central Bank Activities Issue of Banknotes Raising Money for the Government Liaison with International Bodies Controlling the Nation’s Currency Reserves Acting as ‘Lender of Last Resort’ Supervision of the Banking System Advising the Government on Monetary Policy Acting as Banker to the Other Banks Acting as Banker to the Government

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Monetary Policy Relates to government tax and spending Monetary Policy Fiscal Policy Relates to the supply of money KEY PECULIARITIES OF MONETARY POLICIES MANAGED ROLE OF CENTRAL BANKS KEY CONSIDERATIONS CONTROL MECHANISMS In developed nations this is normally managed by an independent central bank. Set the monetary policy or Implement a government set policy Price S tability – controlling inflation Economic growth Employment Exchange R ates Interest rates are a major mechanism for control

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Banknotes Let us consider the European Central Bank Key Function controls the issue of Banknotes Coins MODERN PAYMENT MODES Cash Cheques Standing Orders Direct Debits Mobile Payments Cash is important as banks’ cash holdings are a constraint on the creation of credit . why is controlling issue of cash important?

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Bankers to the Other Banks For whom does the central bank acts as a banker? Other Banks in the Economy Holding Accounts with International Bodies World Bank “ Other banks hold non‐interest‐bearing reserves with it in proportion to their deposits” Central Bank WHAT PURPOSE DOES THIS SERVE? Helps the bank make a profit Serves as an instrument of control over the money supply 1 2

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Bankers to the Government Acts as the government’s banker Receives Pays Out Revenues for taxes or other income. Money for the government’s expenditure. Government Lenders Funds Funds Bills and Bonds Bills and Bonds Central Bank

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Over time, the debt grows and is not, in any real sense, ever ‘paid off’. Does this matter? The first point is that, for any individual, how serious debt is depends on their income. Inflation is also a key factor Finally, to whom is the money owed ? Raising Money for the Government While the Treasury or Ministry of Finance sometimes handles government issues, it is much more common for the central bank to control this and to settle payments through the accounts that banks and financial institutions have with it

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Acting as lender of last resort not only refers to the role of the bank as a periodic rescuer of banks in trouble , it also refers to the fact that the central bank will help the other banks temporarily when they meet problems with their liquidity During 2008, the US, the UK and all European central banks and governments engaged in widespread liquidity support schemes in order to support their banking systems Acting As Lender of Last Resort

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Central banks will liaise with other international financial bodies like the IMF and the International Bank for Reconstruction and Development (IBRD), usually called the World Bank. They also liaise with and take part in discussions at the Bank for International Settlements (BIS) in Basel Regular meetings between G7, G10 and G20 Liaison with International Bodies

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Position of Central Bank Today Inflation is the key target for central banks. Accountability is Another Current Issue. Do We Need a Central Bank? How do we Measure Inflation?

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