The Functions of The Central Bank

1366 Words6 Pages
In simple terms, the central bank is the authority that is in charge of a country’s currency, supply of money, interest rate and credit. More specifically, the central bank uses its monetary policy tools to achieve certain objectives for the benefit of the economic interests of the nation and also to consistent with the government fiscal policy. The idea of central bank can trace back to 17th century. Ever since, a number of countries, such as France, New Zealand, Spain, and the United Kingdom, enact law to make their own central banks more isolate from the government after witnessing the good practice of Germany and Switzerland. So far, the most independent central bank in term of conduction of monetary policy are the European Central Bank and Federal Reserve System in the United State. In this paper we would discuss about three crucial characteristics that lead to the success of an independent central bank. Conservative There is an increasing agreement that a low and stable inflation rate referred to price stability is good for the economy. Some researches indicate that a low and stable inflation rate could help enhance the rate of economic growth. The concept of inflation bias was initially introduced by Kydland and Prescott (1977), they predicted if monetary policy maker is guided by discretion rather than rules, there is a great chance to have time inconsistent problems which, in turn, leads to inflation bias. It is showed, in Barro-Gordon model, that a nation will attempt to lower the unemployment and stimulate output since that will make public be more in favour of government. This action is quite common especially when there is a re-election of government. Based on the Phillips curve, we can know that lower unemployment i... ... middle of paper ... ...nk Independence? A Critical Re-examination.’’European Journal of Political Economy. 18; 653-674. Herrendorf, B., & Lockwood, B. (1997). Rogoff's" conservative" central banker restored. Journal of Money, Credit, and Banking, 476-495. Lilic, A. (1998). Is an independent central bank a good thing? The European Journal.6(1). Mishkin F(2000). What Should Central Banks Do? Federal Reserve Bank Of St. Louis. Mishkin, F. S. (2004). Can central bank transparency go too far? (No. w10829). National Bureau of Economic Research. Schwödiauer, G., Komarov, V., & Akimova, I. (2006 ). Central Bank Independence, Accountability and Transparency: The Case of Ukraine FEMM Working Paper Series, 30. Van der Cruijsen, C. A. B. (2008). The Economic Impact of Central Bank Transparency (No. urn: nbn: nl: ui: 12-3130604). Tilburg University. Walsh,C.(2003) Monetary Theory and Policy. MIT Press

More about The Functions of The Central Bank

Open Document