Central Bank's Key Functions and the Significance of Independence

This report examines the multifaceted functions of a central bank and the critical importance of its independence. It begins by introducing the central bank's role in managing currency, controlling the money supply, and setting interest rates. The report then delves into specific functions, including issuing currency, acting as a banker to the government and other banks, supervising commercial banks, controlling credit and the money supply through tools like bank rates and open market operations, managing exchange rates, and acting as the lender of last resort. The report emphasizes the necessity of central bank independence from political influence to ensure effective monetary policy, price stability, and overall financial stability. It also covers the functions of custodian of foreign exchange, clearing house function, and collection and publication of data. The report uses various sources to highlight the importance of these functions in maintaining a stable economy and preventing financial crises. This assignment is available on Desklib for students seeking study resources.

What are the main functions
of central bank and why is its
independence important?

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Central bank manages the state currency, money supply and interest rates. Central bank
possess a monopoly by which they can create or increase the monetary base so that they can print
the national currency. The primary function of central bank is that they have to control the
money supply of the nation along with the duties such as managing interest rates (Martin, 2015).
Further they have to set reserve requirement and have to act as a last resort during bank
insolvency at the time of financial crisis. This task includes the different functions of the central
bank and central bank is important has to be discussed.
TASK
A central bank is the bank by which they are having the different degree so that they can
charged with that they have to controlling the money supply. Central bank can issue bank notes
and coins by which they can do smooth functioning. They are doing proper trade by the financial
instruments and manage the foreign reserve and play a important role in informing the public
about the economy. Further they have to regulate the commercial banks and stabilize the macro
economy. Central bank is having the different functions so that they can consist the public duty
which influence by regulation, persuasion and also in the market operation so that are having the
financial intermediaries (Bodea and Hicks, 2015). Central bank have a proper control on money
which helps in the development and by that they can not face any problem in money supply.
Central bank acts as a government banker have to hold the deposits and also make the payments
on the behalf of the consumer. Central bank return the notes of the commercial banks so that they
can redeem into gold and silver which helps in proper regulation of the commercial bank which
are having the reserve ratios and then they do the proper money supply. Central banks governed
by the board consisting of its member banks. Central bank is using monetary policy so that they
can affect the economic growth by which they can control the liquidity in the financial system. It
helps in achieving the aim by the tool or the instrument which is monetary policy. Central bank
have to maintain the reserve as they require by the consumers and have to use the open market
operations so that they can not face any problem at the time of financial crisis (Neuenkirch and
Neumeier, 2015). Different functions of Central bank are :-
Issue of currency – It is the important function of the central bank that they are issuing the
currency by which staff members of central bank can secure the money and have to do proper
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control on the money supply. Central bank can keep the reserve in the form of gold and foreign
securities and it is based on the different rules which is against the currency which is issued by
central bank. Central bank of UK issue the currency to the person who are living in the economy
and by issuing the currency to the person they are not facing any problems and by that central
bank can maintain the the reserves which will helps the economy at the time of financial crisis
(Bordo and Siklos, 2015). Along with this commercial banks take the borrowings in the form of
money from the central bank. Commercial banks have to sell the securities to central bank so that
they can create the new notes which help in improving the currency this called monetisation of
budget deficit or deficit financing. The regulatory bodies spend the new currency so that they can
circulate in the economy or nation so that they can meet the expenditure.
Banker to government – Central bank having the different function one of them is both banker
to the government which is important for both central and state government. Along with this it
helps in carrying out the banking business of the regulatory bodies. Ministry have to keep their
cash so that they can maintain the balance in the accounts of the central bank. Further, they
accept the receipts and make payments on the behalf of the government. Central bank have to
give the loans and advances to the government for the periods which is temporary as they have to
manage the public debt of the country (Engel, 2015). The central government have to borrow the
amount of money so that they can sell the money by which they can maintain the reserves and
securities.
Banker's bank and supervisor – There are so many commercial banks by which they can do
the proper regulation and have to supervise the proper functioning and members of central bank
having the duty so that they can discharged by the central bank. Central bank act like banker's
bank in three capacities as it is the custodian of the cash reserve and banks of the country are
required to keep the certain percentage of the deposits with the central bank and have their own
way so that they can be the ultimate holder of the cash reserve of the commercial banks (Micossi,
2015). Another is that the central bank is the lender of the last resort that commercial banks
having short of funds as they have to take the loans from the central bank and have to get the
trade bills so that they can de discounted as it is the great strength of the banking system.
Controller of credit and money supply – It is one of the major function of monetary policy of
the economy which is done by central bank of the UK. They control the credit and money supply
in the economy which can help to maintian the growth rate of the country. The key objective of
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credit control is to provide the price stability and consistency which can leads to increase the
employement in the economy. To control the money supply in the economy they can uses
various tools and measures which can provide and effective control. There can be various types
of tools which can be used by the central bank are as follows:
Bank rate: Bank rate is an interest rate which commercial bank lends from central bank.
If the bank rate is low it can promote investment and on the other hand high interest rate can
decrease the investment.
Open market operations: It is another tool which can be used by the central bank, in
this tool if there is large amount of money in the market. They can sell the government securities
to reduces the money supply. On the other hand if there is lack of money in the market, they can
buys the government securuties like t-bills and bonds by the banks. It can increase the money
supply in the market (Bruno and Shin, 2015).
Exchange control – Another function of the central bank is that they have to use the external
value of the currency which has to be maintained by the central bank of UK. Central bank have
to take the proper steps so that they can ensure with the external value of the currency. Along
with this they have to adopt the different measure so that they can attain the object of the central
bank. Central bank have to use the proper system of exchange and it is the important and
essential measure (Walsh, 2015). Under this system the members should deposit the currency or
they can exchange the currency and for that they have to write the application for that and by that
money is secured.
Lender of last resort – Commercial banks have to exhaust all the resources so that they can
supplement their funds at the time of the liquidity crisis so that they can do the proper approach
that central bank is the last resort. Central bank have to do the guarantee in solvency so that they
have to provide the financial accommodation to the commercial banks by which they can re
discounting with the different securities and the bills of exchange along with this they have to
provide the loans against the securities. They have to use the proper strategies or policies so that
they can not face any problem in the banking system (Hansen and McMahon, 2016). Central
bank have to provide the temporary financial accommodation so that they can save the financial
structure of the country.
Custodian of foreign exchange – Central bank is the custodian of the reserves of foreign
exchange. They have to keep watch n the external value of its currency and have to undertake the
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control on the different exchanges in the management. All the currency in foreign which is
received by the different citizens so that they can do the proper deposition of the currency with
the central bank (Nyborg, 2015). Along with this they have to make the proper payments in the
foreign currency which have to apply to the central bank so that they can not face any issues and
have to make the proper reserves which helps at the time of financial crisis.
Clearing house function – Central bank have to receive the cheques so that they can drawn on
the other banks from the consumers so that they can attain the money from the drawee banks.
They drawn the cheques and passed into the hands of the other banks so that they can realize
them from the drawee banks. At the time of clearing, every cheque take lots of time along with
central bank provide the different facilities so that the consumers can not face any problem at the
time of clearing cheque (Clark, 2015).
Collection and publication of data – It has been entrusted that this function having a different
task in which staff members of central bank do the proper collection and compilation of the
information or data which is in the statistical or mathematical form and by that central bank will
increase the funds in the economy (Reis, 2015).
The employees of central bank have to do the proper regulation so that they can maintain
the reserves which is responsible and helpful in ensuring the financial stability along with this
they have to provide the proper protection to the depositors of funds. In this central bank having
a risk which affect the entire financial industry so that they can keep the proper funds and
maintain the reserves along with the proper security (Fernández-Albertos, 2015). Central bank
have to provide the proper services and provide the loan to their members this affect the
exchange rate in the economy when they add foreign currency. The members of central bank
have to make the proper decisions which helps in making the reserves along with they have to
use the proper policies whether it is fiscal or monetary. They ate having the issues so that they
can make the notes on the basis of federal reserve. They have to do the different function which
includes the clearing of checks. Central bank have to lend the bank with in their districts along
with this they have to collect the proper data on the regional basis and having the different
economic conditions. Central bank have to do the proper research and for that they have to use
the monetary policy as it help in controlling the money. They have to do the proper analysis with
the bank merger and having the applicants with the new activities (de Andoain and et.al., 2015).
They have to examine the different companies and have to maintain the reserves along with this
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they have to do the proper securities so at the time of financial crisis they can not face any issue
or the problem and if they are facing the issues then by using the reserves they can resolve.
If there is any political or governmental influence in the central bank decision making it
can directly affects the growth of the economy therefore, the independent and autonomy is
required for the central bank which can help to achieve sustainable development for the economy
or country. If there is any influential factor of government on central bank it can create a serious
problem for the economy.
They are having the different issues which are having the central bank that should be
independence which having the important subject so that they have to focused on the different
aspects. They have to do the proper examination so that they can do the proper security of the
funds and maintain the reserves and have to make the payments on the point of time so that they
can not face any conflicts or disputes (Breeden and Litzenberger, 2015). Central bank
independence is a path which helps in protecting the policy so that they can make against the
temptation by using the monetary policy in the various ways. This is the important reason by
which central bank independence so that they can appear and it should be strongly supported by
the citizens. This includes the four categories of central bank independence which includes
functional, institutional, personal and financial. There are different issues which are related and
also affect the independence of central bank that is central bank is doing the proper involvement
in prudential supervision (Koulischer, 2015). They are having the nexus between the
independence and accountability along with this they are having the cooperation and dialogue
with the other policy makers in the economy. Monetary policy is used by the central bank so that
they can do the proper management by the regulatory bodies. In then trends, they have to use the
monetary policy so that they can do the proper independent central banks. The members of the
central bank is appointed by the ministry and have to provide the proper guidelines along with
this they have to make the proper decisions so that they can maintain the proper reserve and have
to do the proper securities of the funds which is done by central bank. The government which are
having responsible so that they can set the interest rates along with they are having a political
business cycle. The government having the proper influence which having the economic cycle so
that they can coincide with elections. Along with this they are having the reduction of the interest
rates. It helps in boosting the disposable income so that they can increase the economic growth
and have to reduce the unemployment (Mehrotra and Yetman, 2015). Central bank have to use
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the proper policies so that they can attain the goals by which they can grow faster which leads to
inflationary pressure. The government have to increase the interest rates so that they can reduce
the inflation. If in the economy having a recession so that they are having the time so that they
can recover from the situation and by that central bank will attain the goals and objectives.
At the period of recession they have to reduce or cut the interest rates so that they can
boost up the growth of the economy and have to use the proper policy which is related to the
monetary in the quantitative methods. It involves in creating the money and have to buy the
government bonds. It was having the aim so that they can reduce the interest rates and have to
increase the money supply. They have to involve which creates the money so that they can
reduce the risk which creates the future inflation (Maiyaki and Mohd, 2015). This quantitative
easing makes the bank so that they having the more political for example they have to make the
proper decisions so that government bonds can buy which helps the regulatory bodies which
helps in borrowing more that having a low interest rate. They have to use the top financial firms
and bankers along with this they are having fraction of the extra money filtered through into
loans for the small companies. The policy which helps in having the deflationary impact of the
cuts which having the government spending and by that they can maintain the stability and
improve the flexibility. The staff members of central bank have to set the target of law inflation
so that they can remove the problem of unemployment and having the low economic growth.
Monetary policy having the impact of monetary policy which having the low interest rate on the
distribution of the income between the savers and borrowers. Further, it helps in changing the
climate. Inflation and the booms having the major issue. This independence having the
improvement in real economic performance which insulate the economy from the fluctuation due
to political business cycles. They have to use the proper politics which helps in the business
cycle so that they have to maintain the economic stability and have to reduce the risk (Barisitz,
2015). Central bank having the high inflation rate which is having a negative impact so that they
can create the distortions and have to raise the risk along with this they have to encourage the
seeking behaviour. By the performance of the economy so that they have to maintain the low
inflation rates which having the independent central bank by which they can achieve the goals
and objectives. They have to trade off between the financial stability and price stability by which
they can resolve the problem so that they can maintain the reserves and have to do the proper
security of the funds.
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CONCLUSION
From the analysis which has been done previously it has been found that central bank
have the many responsibilities which help in the monetary system of economy. Central bank
have to use the proper monetary policy so that they can maintain the proper reserves which helps
at the time of financial crisis so that they can attain the specific goals which includes the
currency stability, low inflation and full employment. Central bank having the important role so
that they have to do the proper activities so that they can continue which helps in attaining the
aims and objectives. They have to use the proper powers so that they can attain the goals and
objectives.
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REFERENCES
Books and journals
Breeden, D.T and Litzenberger, R.H., 2015. Central Bank Policy Impacts on the Distribution of
Future Interest Rates. Available at SSRN.
Barisitz, S., 2015. Banking transformation 1980-2006 in Central and Eastern Europe-from
communism to capitalism. South-Eastern Europe Journal of Economics. 7(2).
Bodea, C and Hicks, R., 2015. Price stability and central bank independence: Discipline,
credibility, and democratic institutions. International Organization. 69(01). pp.35-61.
Bordo, M.D and Siklos, P.L., 2015. Central bank credibility: An historical and quantitative
exploration (No. w20824). National Bureau of Economic Research.
Bruno, V and Shin, H.S., 2015. Capital flows and the risk-taking channel of monetary policy.
Journal of Monetary Economics. 71. pp.119-132.
Clark, G.L., 2015. The geography of the European Central Bank: form, functions and legitimacy.
Journal of Economic Geography, p.lbv015.
de Andoain, C.G and et.al., 2015. Lending-of-last-resort is as Lending-of-last-resort Does:
Central Bank Liquidity Provision and Interbank Market Functioning in the Eruo Area.
Centre for Economic Policy Research.
Engel, C., 2015. International coordination of central bank policy. Journal of International
Money and Finance.
Fernández-Albertos, J., 2015. The politics of Central Bank independence. Annual Review of
Political Science. 18. pp.217-237.
Hansen, S and McMahon, M., 2016. Shocking language: Understanding the macroeconomic
effects of central bank communication. Journal of International Economics. 99. pp.S114-
S133.
Koulischer, F., 2015. Asymmetric shocks in a currency union: The role of central bank collateral
policy.
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Maiyaki, A.A and Mohd, S.S., 2015. Effects of Electronic Banking Facilities, Employment
Sector and Age-Group on Customers? Choice of Banks in Nigeria. The Journal of Internet
Banking and Commerce, 2010.
Martin, F.M., 2015. Debt, inflation and central bank independence. European Economic Review.
79. pp.129-150.
Mehrotra, A.N and Yetman, J., 2015. Financial inclusion-issues for central banks. BIS Quarterly
Review March.
Micossi, S., 2015. The monetary policy of the European Central Bank (2002-2015). CEPS
Special Report. 109.
Neuenkirch, M and Neumeier, F., 2015. Party affiliation rather than former occupation: The
background of central bank governors and its effect on monetary policy. Applied
Economics Letters. 22(17). pp.1424-1429.
Nyborg, K.G., 2015. Central bank collateral frameworks.
Reis, R., 2015. Different types of central bank insolvency and the central role of seignorage (No.
w21226). National Bureau of Economic Research.
Walsh, C.E., 2015. Goals and rules in central bank design.
Online
Function & The Role of the Central Bank. 2016. [Online]. Available through:
<http://www.centralbank.cw/about/function>. [Accessed on 20th December 2016].
What are the Main Functions of Central Bank?. 2016. [Online]. Available through:
<http://www.businessstudynotes.com/banking-finance/what-are-the-main-functions-of-
central-bank/>. [Accessed on 20th December 2016].
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