publish2017-06-16 1:29 pm

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Central Banks and Monetary Policy

monetary policy


The country monetary and financial system is the backbone of the country’s economy. The purchasing power of the national currency, the interest rate, and the different credit lines offers by banks to the productive sector depends on the central banks and its monetary policies.

What is a Central Bank?

The Central Bank, Reserve Bank or Federal Reserve in the US, is the country’s Monetary Authority (or region e.g. European Central Bank). It is a public institution responsible for money supply including printing money, bank’s regulations and supervision, and interest rate fixation. The central bank is a branch or work under the control of the national government. It controls the national money and credit situation, or how, and to what extent a government intervenes in the economy, it does not work for profits. Its role is committed to promote and safeguard monetary, national currency and prices stability in the country.

What is Monetary Policy?

Monetary policy is the general name given to the strategies and plans created by the central monetary authorities or the Central Bank to control the macroeconomics factors or to give economic stability to the nation. The Monetary Policy dictates the money supply, the forex exchanges rates, and the interest rate with the goal to produce a healthy economic growth and to keep prices stability over time.

What are the Central Bank functions?

  • Promote a sound financial structure monetary stability in favor of the country
  • Issue and supply the bank notesand coins or circulating money
  • Manage the credit volume and ensure it is adequate to meet the productive sector and country’s demands.
  • Control the inflation and preserve prices stability and promote full employment
  • Licensing, controlling, and regulating the banks and financial institutions, insuring the customer deposited money.
  • Function as the government bank covering and receiving payment on its behalf.
  • Lender of the last resource
  • Custodian of Foreign Exchange.

Basics Types of Monetary Policies

There are two basic types of monetary policies: the contractionary and the expansionary.

The Contractionary Monetary Policy is used to control or reduce the inflation. It does it basically by reducing the money supply, increasing the interest rate and selling securities through open market operations

The Expansive Monetary Policy is used to promote economic growth, lower the unemployment rate, reverse or avoid recession, increase sales and people spending. It does it basically by doing the opposite of the contractionary policy. It


Monetary Policy’s tools

The Monetary policy’s tools are the different mechanisms, which the Central Bank will use to control the national’s economic. The most widely used are.

Set the cash reserve requirements, which is the minimum amount of money a bank has to keep in its safe without lending it.

Bank rate, the interest that the central bank charges to others banks for borrowing money,

Open market operations is selling or buying government securities

Exchange control is external currency value with respect to the main global currencies.

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