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The Central Bank
The central bank is a "bank" in the sense that it holds assets
(foreign exchange, gold, and other financial assets) and liabilities.
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Roles of Central Banks
The central bank (CB) regulates and supervises
depository institutions.
The main roles of central banks are:
• To ensure monetary stability through monetary
policy tools that keep inflation low and stable, and,
hence, preserving local currency purchasing power
and promoting economic activity
• To ensure financial stability and to have resilient
and efficient financial system
• To have effective policy for risk management and
control supervision
• To issue and enforce anti-money laundering and
fraud laws
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Roles of Central Banks (Cont…)
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Roles of Central Banks (Cont…)
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CBB’s Objectives
• Monetary policy is the management of the money
supply for the purpose of maintaining stable prices,
full employment, and economic growth.
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Open Market Operations (OMO)
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Open Market Operations
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Open Market Operations
3. Easily reversed.
4. Quickly implemented
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Discount Policy –3 types of loans
1. Primary credit:
Standing lending facility
Provides backup source of liquidity
2. Secondary credit
credit given to the banks in financial trouble
i is higher than by 0.5% (50 basis points) as a penalty
3. Seasonal credit
To meet the needs of limited number of small banks in vacation and
agriculture areas that have seasonal pattern of deposits.
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Discount Rate
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Discount Rate (reduce inflation)…
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Discount Rate (reduce unemployment)…
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Discount Policy
–Advantages & Disadvantages
Used to perform role of lender of last resort Important during the
subprime financial crisis of 2007-2008.
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Advantages:
1. No announcement effect.
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Reserve Requirements:
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Reserve Requirements:
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In conclusion
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Money Supply Growth Targets
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Central Banks Independence
• Although central banks are part of the
government, they usually have much more
independence than other government
agencies.
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Central Banks Independence
• The central bank has the ability to set its monetary
policy goals, whether inflation targeting, control of
the money supply, or maintaining a fixed exchange
rate.
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Central Banks Independence
2. Instrument (Operational) Independence:
The central bank has the ability to determine
the best way of achieving its policy goals,
including the types of instruments used and
the timing of their use.
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Central Banks Independence
3. Management Independence:
• The central bank has the authority to run its
own operations (appointing staff, setting
budgets, etc) without excessive involvement
of the government.
• the aim of independence is primarily to
prevent short-term interference.
• Governments generally have some degree of
influence over even "independent“ central
banks;
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Central Banks Independence
• International organizations such as the World
Bank, the BIS and the IMF are strong
supporters of central bank independence.
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