Role of Central Bank in the Economy - Essay Example

number Role of central bank in the economy For a long time, the central bank has been a primary agent for monetarypolicy. It has various functions that lie in the bringing about of financial stability. This is especially important when financial times become difficult and are faced by challenging moments. However, the role and the structures provided by the central bank vary from one country to the other. They are largely dependent on the independent authority and level of responsibility. Picker (64) contends that there are varied circumstances surrounding the development and initiations of central banks all over the world. They all have different origins hence the difference in the roles and functions that they are expected to play. While some of them were established as a special purpose upon which the government banks were brought up to bring about order in the way that bank notes are issued, others were developed to act as sources of funding for the governments (Downes & Vaez-Zadeh 92). There are other central banks that started off as large commercial banks that dominated and subsequently were able to boost the economy by offering the monopoly rights to provide bank notes. Most of the central banks started their operation during the 20th century as central banks that held the public policy agencies to conduct the functions related to central banking. However, the bundles of functions associated with the central bank have always differed in a substantial way from one country to the other. In this paper the main functions and roles of the central banks will be analyzed and an evaluation performed o whether the central banks should be made independent (Touffut 52). Functions towards the economy The key functions of the central bank revolve around the fact that the central bank is an agency that is expected to perform the conducts of monetary policy and provide the means through which it can be settled. In the past, they functioned as the government’s bankers, the monopoly of issuing notes, the banker’s bank, the last resort lender, controller and regulator of credit and the maintenance of external stability (Goodhart xiii). The most important function of the central bank has been linked to the role of financial stability. However, it is considered as the objective that extends or goes beyond the objectives of functions, which contribute towards financial stability. Nonetheless, it is still applicable in many countries where for example in China, it is the role of the People’s bank to ensure that financial risks are mitigated with the effort to provide financial stability (Touffut 10). In spite of this fact, the function that is most widely stated with regard to the central bank is that of the monetary policy (Picker 85). However, in cases where the objectives related to financial responsibilities are wider, the central banks are expected to promote a safe, stable and sound financial system. It can also be defined as the contribution towards financial stability or towards the actions of another organization that pursues financial stability. The other objective that is found within the central bank law is the function of the payment system oversight. This includes the supervision of the smooth operations of the payment and clearing system as well as the making sure that the payment systems are functioning in a proper way. There are trade-offs included among the objectives. In this sense, central banks are faced with the task of enhancing economic growth whilst maintaining stability in these economies. This is especially in the developing countries where they play a major role of developing the banking and financial system due to lack of well established and organized capital and money markets (Touffut 2). Why Central banks should be made independent Banks are a vital component of any government’s economic system. It is only until recently that they were considered to be a very important part of the integral and central policy making machine of a government. Nonetheless, it reached a point where central banks became concerned with targeting issues of inflation. It is because of this that it became important to separate the central bank from the government. They were to be made independent from the political aspect. In this case, the board of directors of the central bank is expected to be selected by the people. Therefore, they can be held accountable to the people for their decisions, their misjudgment and mistakes. Thus, independent central banks are operated within complex and elaborate rules of the creation of money and credit. The control of central banks simply means the control of money, which is the overall symbol that all the activities in the country are under control. Subsequently, the governments will not be in the possession of the kind of power that corrupts due to the lack of their signature. This is because if they are controlled in a political way, the political group that is in charge obtains too much power. In this case, with the risk of a financial crisis in the current times, it can only be hoped that deflation will not be a serious threat (Goodhart xiii). This will help to keep the governments away from inflating the supplies of the market through an automatic mechanism. With this, the country’s balance of payment will be at equilibrium. The making of the central bank independent in most countries in an easier way means the acquisition of confidence. It is related to the monetary policy which if expected to have an impact, then it is important for the central bankers to command their trust from individual citizens. In most countries such as South Africa, New Zealand and Venezuela, a formal constitutional independence has been offered to the central banks from the government’s executive branch. They are thus no longer subservient and mandated to take instructions from the governments. Conclusion The central bank has different roles within the developed and developing countries. Besides performing some of its traditional roles, it is also required to undertake the modern responsibilities. It is these that with the evolving roles influence the economic activity and stability of different economies. Works Cited Downes, Patrick, & Vaez-Zadeh, International Monetary Fund Central Banking Department; Seminar on Central Banking. The evolving role of central banks: papers presented at the 5. Seminar on Central Banking, Washington, DC, November 5-15, 1990. Washington, DC Central Banking Dept., International Monetary Fund, 1991. Print. Goodhart, C. A. E. The Central Bank and the financial system. Cambridge, Mass. : MIT Press,1995. Print. Picker, D. Anne. International economic indicators and central banks. Hoboken, N.J. : Wiley, 2013. Print. Touffut, Jean-Phillippe. Central banks as economic institutions. Cheltenham, UK; Northampton, MA : Edward Elgar, 2008. Print. Read More