Lecture 5 central bank, fuction, monetary policy, objective

Introduction
The bank which is responsible for the financial and
economical stability of country.
It has a pivotal position in the banking system and
regulates and formulates policies for the scheduled
commercial banks in the country.

Role of Central Bank
A central bank has become a must for every
country and its economy.
It controls other banks, inflation (price
increase) and formulates its economic and
fiscal (economic) policies and advises the
government on foreign trade, development
of financial and capital market, balance of
trade, foreign aids etc.

The world bank (IBRD) and international
monetary funds (IMF) have their full control
over all central banks, especially those in
the Third World countries.
Every country, being the member of the UN,
has no option except to follow the dictates of
the IMF and the World Bank.

Functions of Central Bank
Central bank can be placed in two broad
categories.
1- Government’s bank
2- Banker’s bank

1- Government’s Bank
1- Monopoly (control) of note issue
2- Controller of credit
3- Custodian of foreign exchange
4- Issue and management of public debts
5- Development of financial institutions

1- Monopoly of note issue
Issue currency notes for the country. Notes are
issued on certain principal including a fixed ratio of
a reserve of gold, silver and approved foreign
exchange.

2- Controller of credit
The central bank controls and regulates
credit money in the country in order to
expand or contract it to maintain the
requirement of economy.
It controls:
Bank rate policy
Open market operation
Bank reserve ratio

3- Custodian of foreign
exchange
Every country exports goods and services to
earn profit.
This earned and other foreign exchange is
held in the custody of the central bank

4-Issue and management of
public debts
Central bank manage issue of debts, payment of interest
and retirement.
Pay annual interest and return the principal amount on
maturity.

5-Development of financial
institutions
Central bank is responsible to develop financial
institution which play vital role in industrial, agriculture
and capital development of economy.
It also facilitates the establishment and running of
money market and stock exchange.

2- Banker’s bank
Capacity to performs valuable services to its
scheduled commercial banks.
1- Lender of last resort
2- Rediscounting bill of exchange
3- Clearing housing services
4- Cash reserve
5- Counseling services

1- Lender of last resort
O The central bank provides loan to the
bank in crises to enable it to discharge its
obligation (responsibility) and thus
prevents (avoid) it to go bankrupt (cleaned
out).

2- Rediscounting bill of
exchange
Bill of Exchange is a non-interest-bearing
written order used primarily in international
trade that binds one party to pay a fixed
sum of money to another party at a
predetermined future date.

Bills of exchange are similar to checks and
promissory notes. They can be drawn by individuals
or banks and are generally transferable by
endorsements.
The difference between a promissory (conveying or
implying a promise) note and a bill of exchange is
that this product is transferable and can bind one
party to pay a third party that was not involved in its
creation.
If these bills are issued by a bank, they can be
referred to as bank drafts. If they are issued by
individuals, they can be referred to as trade drafts.

3- Clearing housing services
Every bank receives cheque drawn on other
bank, because of which every bank
becomes creditor or debtor of other banks.
All these cheque are sent to the central
bank where it settles all the accounts of the
bank.
Clearing services is possible because the
central bank possess cash reserve of
commercial bank.

4- Cash reserve
Every bank is bound to deposited a certain
percentage of all its deposits with the central
bank
In this manner central bank finds itself in
better position to control credit money.

5- Counseling services
The central bank offers advice and
counseling services in the light of experts
and advice commercial banks to formulates
and readjust their polices.

What is Monetary Policy??
It is the process by which the central bank
or monetary authority of a country regulates
(i) the supply of money (ii) availability of
money and (iii) cost of money or rate of
interest in order to attain a set of objectives
oriented towards the growth and stability of
the economy

Monetary policy is one of the tools used to
control the supply and availability of money, to
influence the overall level of economic activity in
line with its political objectives. Usually this goal
is "macroeconomic stability" - low
unemployment, low inflation, economic growth,
and a balance of external payments. Monetary
policy is usually administered by a Government
appointed "Central Bank

It is concerned with the changing the supply of money
stock and rate of interest for the purpose of stabilizing
the economy by influencing the level of aggregate
demand.
At times of recession monetary policy involves the
adoption of some monetary tools which tends to
increase
the money supply and lower interest rate so as to
stimulate aggregate demand in the economy.
At the time of inflation monetary policy seeks to
contract
aggregate spending by tightening the money supply or
raising the rate of return.

Objectives of Monetary Policy
1. To ensure the economic stability at full
employment or potential level of output.
2. To achieve price stability by controlling
inflation and deflation.
3. To promote and encourage economic
growth in the economy

Lecture 5 central bank, fuction, monetary policy, objective

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