Central Bank of Central Bank for Economic Development

Essay 15 Running Head: Essay [Name] [Institute] [Date] Introduction 3 Importance of Central Bank for Economic Development 3 Financial Institution Development 4 Adjustment of Demand and Supply of Money 5 Affordable Interest Rate Policies 6 Management of Debts 6 Controlling Credit Rates 7 Balance Payments Problems 9 Influences of Central Bank for the Economy 9 Macroeconomic Influences 10 Microeconomic Influences 10 Political Independence and Power of Central Banks 11 The Financial Stability Objective in a Crisis for a Central Bank 12 Conclusion 12 References 14

Running Head: Essay
[Name]
[Institute]
[Date]

Essay 2
Table of Contents
Introduction......................................................................................................................................3
Importance of Central Bank for Economic Development...............................................................3
Financial Institution Development...............................................................................................4
Adjustment of Demand and Supply of Money............................................................................5
Affordable Interest Rate Policies.................................................................................................6
Management of Debts..................................................................................................................6
Controlling Credit Rates..............................................................................................................7
Balance Payments Problems........................................................................................................9
Influences of Central Bank for the Economy..................................................................................9
Macroeconomic Influences........................................................................................................10
Microeconomic Influences.........................................................................................................10
Political Independence and Power of Central Banks.....................................................................11
The Financial Stability Objective in a Crisis for a Central Bank..................................................12
Conclusion.....................................................................................................................................12
References......................................................................................................................................14

Essay 3
Introduction
In any state central bank are the ones which control the money supplied and how it is
delivered to the customers. A central bank cannot just print money and give them to the economy
but it also checks the regulation of the commercial banks in distribution of the money. The
functions of a central include many monetary policies which gives it power over the exchange
rates, money supplied and the inflation. Central bank consists of different tools by which it puts
the control of money. For example, it has the power to adjust the interest rates in controlling the
inflation rates, to weaken the domestic currency it can also buy foreign currency and can also
involve in open market operations by the use of purchase of the assets by financial institutions. It
can be said that a central is based over the rules and regulations of monetary tools to reach its
aims and objectives. These monetary policies differ from country to country but they all have the
common target of inflation, economy growth, unemployment and to become more financially
stable.
For a country with a developing economy the central bank performs customary and
publically required functions. These customary task that are performed by the bank are like
gamble of notes issued, bankers for government, the banks of the bankers, last resorted lenders,
stable exchange rates management and the controller of credits. All of these functions are related
to the functions that help the economy of any state to develop and become more stable.
(Goodhart and Lastra, 2018)
Importance of Central Bank for Economic Development
A central bank of any country always seeks for the betterment and management for the
increasing level of the rate of employees, productivity and incomes for the country. In

Essay 4
underdeveloped countries a central bank provides wide range of powers in order to promote the
growth of its economy. Their main tasks and functions include the following towards this end.
(Barresi and Zatti, 2020)
Financial Institution Development
Central bank of any country which is underdeveloped aims in improving and enhancing
the currency and the system of credit of the state. In order to do so the central bank requires more
institutes or banks that has for setting up it gives large credit facilities and also distract the
intended reserves to fecund networks. These monetary institutes are contained in the bigger
capitals of the infantile states so it can provide the facility of credit to the estate, commercial
houses, industries and even plantations. To solve this central bank has to spread its division for
bank to other rustic parts to make the credit system obtainable for the laborers, minor businesses
and dealers. The central provides one short-term loans in the underdeveloped countries.
(Goodhart and Lastra, 2018) The credit facility system for the rural areas is mostly not present.
Only sources for the rural areas for such credit systems are the village moneylenders who will
charge extraordinary interests on the loans.
This rule of village moneylenders can be diminished by installation of new institutional
arrangements by the central banks that can provide short, medium and long-terms of credit at low
interest rates for the people of the rural areas. Therefore, a network of these cooperative credits
banking system from the central banks can help to solve these problems. It would be very helpful
for the establishment of the lead banks through the regional rural banks that can provide credit
facility system to the farmers, agriculture workers and other people of the village. Since the
central bank has a vast resource under their command, they can help in establishing financial

Essay 5
corporations and banks to finance many industries and businesses of the country. (Cieslak and
Schrimpf, 2019)
Adjustment of Demand and Supply of Money
It is the most vital role of the central bank in managing and adjusting the demand of
money and supply towards the consumers. There will be deviation between both of them if there
is an imbalance present. (Szyszko, 2017). If the there is a scarcity of money stock the economy
will constrain development and excess of the money supply will ultimately result in inflation.
Growing economy of any estate increases the demand of money to gradual monetisation for the
non-monetised sectors which cause an increase in the productions and prices from industries or
agriculture.
The demand of money for transactions and theoretical motives will rise. Therefore, the
increase for the supply money has to be greater than the proportionate in order to increase the
demand of money to reduce chances of inflation among the estate. The increase of money
supplied can be used for any speculative reason which cans also resulting in inhibiting growth
and inflation. Central bank has the political power to control the use of credit or money by the
monetary policy. For an undeveloped economy the central bank must be controlling these
supplies of money in such a way to prevent the pricing level from increasing so that the
investments and productions do not get affected. (Barresi and Zatti, 2020)
Affordable Interest Rate Policies
In an underdeveloped economy the interest rates are usually structured very high which
are not suitable or affordable for the consumers. There is a huge alteration among long-terms and

Essay 6
short-terms of interest charges and also between the rates of the different parts of budget. High
interest charges in the economical sectors perform as an complication for the growth of all
private and public investments for the country.
A low rate of interest is recommended to enhance the private investments in agricultures
and industries. In the underdeveloped countries the businesses have little savings from the
undistributed profits. For that they have to take loans from the banks to invest. This rate of
borrowing depends upon the rate of interests. However, a low rate of interest will be a cheap
money policy. Lower rate of interest will make public borrowing easy, keep the debt low and
help for the development of economy of the estate. (Haldane and McMahon, 2018). The role of
central bank is to discourage the flow for resources into any sort of borrowing and investments
and the central bank must be following a policy of discriminatory rates of interest. The bank
charging higher rates for non-essential and non-productive loans and it does not implement the
savings which are interest-elastic for the estate.
Management of Debts
One of the significant purposes of the central bank includes the debt management for the
country. The bank must be aiming at correct scheduling and issuing the bonds, maintaining
prices and recuing the cost of public debts. It is the duty of the central bank of selling and buying
of the government bonds and to make timely changes in the structure of the public debts. To
strengthen and stabilise the market of the government bonds, the rate of interest should be made
low. A low rate of interest increases the prices of the government bonds, to make them more
attractive for the public and giving an impetus for public borrowing programs from the
government. This maintenance of low structure of interest rate is called for minimisation of the

Essay 7
cost of services for the national debt. (Curtin, 2017). Central banks also encourage funding for
debts by private firms. It can be said that for stable debt management the existence of proper
developed money and capital markets are required which has to be present in a wide range of
securities for long- and short-term periods. These aspects are under the control of the central to
develop.
Controlling Credit Rates
The central banks have the authority to control credit so that the patterns of investments
and the development of the economy of the country increase. Central bank ensures the control of
inflationary pressures evolving in the development process. For that the central bank needs the
use of both qualitative and quantitative methods for credit control. The operations of open
markets are not successful in controlling the inflation rate in the country due to the bill market
being undeveloped and small. The commercial banks however keep an elastic cash deposit rate
because the control of central banks over them is not complete. They must also be investing in
the government securities because of their low rate of interests. However, by not involving in the
government securities investments they also prefer to keep their reserves in liquid forms like in
gold form, foreign exchanging and money. These commercial backs are not fond of borrowing
from the central banks. (Barresi and Zatti, 2020)
The policy of the central bank in credit control is not so effective due to the lack of
discounts in bills, narrow sized bill market, large non-monetised sectors for transactions,
existence of huge unorganised money market and the habit of banks to keep large money
deposits. For the credit control the use of the variable reserve rate method is found to be more
efficient than any open market operation for the central bank. The market of securities is very

Essay 8
small and causes the open market operations to be unsuccessful. (Cieslak and Schrimpf, 2019)
The rise and fall of the credit stability from the central bank will reduce the cash availability for
the commercial bank without adversely affecting the prices of the securities. The commercial
banks however keep a large reservoir for the cash that cannot be reduced by raise in the bank’s
rate of sales for securities from the central banks. But increasing in the cash reserving will
decrease the liquidity from the banks. The use of variable reserve ratio has to be limited. First of
all, the non-banking institutes will not be keeping the deposits with the central bank to not get
affected by it and secondly those banks who maintain their excess liquidity find more ease than
those who does not. These quality control measures for credit are very effective as compared
with the quantitative measures for influencing allocation of credit and the pattern of investments.
In many underdeveloped and developed countries, the people invest in gold, real estates,
inventory and jewelries the most rather than in the productive systems such as agriculture,
plantations, industrial areas or mining. (de Haan et al., 2018)
The selection of credit control is more correct in limiting the credit facilities for such
types of unproductive activities. These are beneficial for the control of speculative activities such
food-grains or raw materials. (Haldane and McMahon, 2018) Investment in such sectors is
proven to be more useful for controlling the sectional inflation of the economy of the estate.
They increase the demand of imports by making it necessary for the importers to deposit an
advance amount which is equal to the value of the foreign company. The central bank has the
power to reduce the reserves of the banks so far by their deposited money which is transferred to
the central bank. These selective controls for the credits change the required margin by many
certain aspects of collateral, consumer credit regulation and rationing of the credits.
Balance Payments Problems

Essay 9
This function of central bank prevents and solves any sort of problems generated in the
balance of payments for any developing economy. Many economies face difficulties due to the
imbalance of the payments for the targeted development plans. This imbalance affects the
imports and exports that might result in slowing down the development process. Central bank
has the authority to manage and maintain the foreign exchanges of the nation and actions like the
technical advice-giver for the government to change or manage the foreign exchange policies.
The central bank works to avoid any fluctuations in the rates of the foreign exchange and to
preserve the stability. The central back does go over such exchange controls and the variations
for the bank rates. For example, if value of the currency of the nation falls, it will raise bank rate
and enhance the flow of the foreign currencies. (Reisenbichler, 2020)
Influences of Central Bank for the Economy
A central bank has two types of influential functions for the economy of any country.
 Macroeconomic influences are the regulation of inflation and price stability.
 Microeconomic influences involves the functioning as the lend for last resort.
These two influences of the central bank are discussed below;
Macroeconomic Influences
As a central bank is responsible in stabilisation of the prices, it must also regulate
inflation level by controlling the supply of money under the monetary policies of the bank. The
central bank performs the open market transactions (OMO) which inserts the marketplace with
the fluidity or absorption with additional reserves which openly distresses the level of price rises.
In order to upsurge the quantity of capital in the flow and reduction of the rate of interest for

Essay 10
loans and borrowing the central bank can also buy the bonds from government, bills and further
administration issued resources. This purchasing of bonds can also lead the increase of inflation
rate. To reduce the inflation, rate the central bank will absorb money and sell their government
bonds to the open market to increase the interest rates and slow down borrowing process. The
politics of the open market is the key aspect for the central to control the inflation rate, money
supplied and prices. (Möller, 2020)
Microeconomic Influences
The central banks are established as the lender of last resort that has restricted their needs
for the freedom in any commercial banking. A commercial bank will be offering funds to the
clients of the basis of first come, first serve. If these commercial banks don’t have enough
liquidity to fulfill the needs of the consumers’ demands (commercial banks doesn’t have reserves
which is equal to the needs of entire open market) the commercial banks will deviate the central
bank in borrowing additional funds. This method provides stability for the commercial bank in
the objective way. However, the central bank cannot favor any particular commercial bank in
terms of funding. So many central banks hold their commercial bank’s reserves which are based
on the ratio of those bank’s deposits. (Barresi and Zatti, 2020)
Political Independence and Power of Central Banks
It is not right to say that the central bank has all the political freedom and power it
requires but it does have enough to make policies on their demands. The central banks have been
playing a vital role in the policy making against their legal mandates that has to be implemented.
In recent times the political power of the central bank has been increasing and because of the

Essay 11
financial crisis, the public banks have taken many of the direct responsibilities for the financial
supervision and regulations. The central banks have pushed the monetary policies to a new level
to control the global economy. In Europe the political barriers for the central bank have limited
their legislative responses due to the crisis which has forced the regulation institutes to carry out
the slack. Because of which currently the central bank possesses wider policy making authority
and political power than they had a decade ago. However, with greater power the responsibility
of the central banks has increased. Studies shows in the recent years many books have
challenged the ideas and regulations imposed by the central banks. (de Haan et al., 2018) The set
of theories explains that the influential aspects of the central bank in policy making only marks
the inflation ridden crisis for the economy. Extolling the political independence of the central
bank is found to be the best way for the government to maintain the pricing stability of the
nation. The research argues that the officials elected will always be putting the monetary policies
power under the most consideration to gin up the economy.
Increase of the global financial crisis of the world has left some of the foundations and
empirical claims for the credit control commitment theories to be called into questioning. As the
engagement of the central bank in the extensive public affairs has been doing efforts in
stabilising the economy the central bank uses its power for more conservative functioning, price
stability and maintaining their relationships with the foreign exchanges. Many financial institutes
have provided innovation expansion for the policies and remained committed to reduce the rate
of inflation the influence of the ideology of the interest rate for a central bank’s independence
has insulated the decision-making from the politics. Indeed, the central banks have more power
politically for policy making but the distributive effects of the central bank in maintaining the
economy of the estate is almost undeniable. (Szyszko, 2017).

Essay 12
The Financial Stability Objective in a Crisis for a Central Bank
The main function of the central bank during a financial crisis is to contain and stop the
damage to the economy and limits its impact over the real economy of the country. The central
bank will firstly restore calm in the financial markets to reduce any sort of panic among the
people. This panic is said to be equal to a heart attack caused by stopping the flow of credit to all
the finance institutes. (Reisenbichler, 2020) The panic among the institutes can enhance and
increase the damage to the money supply system and is the main path through which the panic
can affect the economy of the estate. The central banks have to reduce any sort of uncertainty
which ensures that market for a short-term period to function properly. If there is no mechanism
for the resolution for the insurance of the stability of the capital system due to the crisis among
the economy, Central bank must prevent any sort of problem which leads the economy to get
under a crisis. (Braun, 2020)
Conclusion
Central banks are the most important part of a developing country which manages and
controls all the inflows and outflows of the money. They play an important in achieving the
economic development for the country by different types of methods and measures. As
mentioned above the central bank is essential for the stability of the interest rates and debts and
should also promote the people to attain full employment of the resources, overcoming
imbalance between payments and to maintain the flow of exchange rates. It is an independent
national authority which takes parts in the policy making and regulates the commercial banks.

Essay 13
The goals for the central banks are to stabilise the currency of the nation and prevent the rate of
inflation. (Curtin, 2017)

Essay 14
References
Barresi, R.G. and Zatti, F., 2020. The Importance of Where Central Bank Digital Currencies Are
Custodied: Exploring the Need of a Universal Access Device. Available at SSRN
3691263.
Braun, B., 2020. Central banking and the infrastructural power of finance: The case of ECB
support for repo and securitization markets. Socio-economic review, 18(2), pp.395-418.
Cieslak, A. and Schrimpf, A., 2019. Non-monetary news in central bank
communication. Journal of International Economics, 118, pp.293-315.
Curtin, D., 2017. ‘Accountable independence’of the European Central Bank: seeing the logics of
transparency. European Law Journal, 23(1-2), pp.28-44.
de Haan, J., Bodea, C., Hicks, R. and Eijffinger, S.C., 2018. Central bank independence before
and after the crisis. Comparative Economic Studies, 60(2), pp.183-202.
Goodhart, C. and Lastra, R., 2018. Populism and central bank independence. Open Economies
Review, 29(1), pp.49-68.
Haldane, A. and McMahon, M., 2018, May. Central bank communications and the general
public. In AEA Papers and Proceedings (Vol. 108, pp. 578-83).
Möller, R., 2020. Systemic Importance of Central Bank Communication: ECB Policy
Announcements and Systemic Risk in the Eurozone. Available at SSRN 3644439.
Reisenbichler, A., 2020. The politics of quantitative easing and housing stimulus by the Federal
Reserve and European Central Bank, 2008‒2018. West European Politics, 43(2), pp.464-
484.

Essay 15
Szyszko, M., 2017. How the central bank makes decision on interest rates? A comparative
analysis of forecast importance. Equilibrium. Quarterly Journal of Economics and
Economic Policy, 12(2), pp.281-294.