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Central Bank
A central bank plays a crucial role in the financial system of a country. It is responsible for maintaining monetary stability, regulating the banking industry, and overseeing the overall economic health of a nation. The central bank acts as the banker to the government, commercial banks, and sometimes even to the public. This mind map will explore the functions, objectives, and tools of a central bank, as well as its significance in the economy.
Edited at 2023-08-08 14:10:32- Recommended to you
- Outline
Central bank
Main functions
Government's bank
print money
lend money to govemerment
conduct monetary policy
Banker's bank
provide loans during times to financial stress
manage the payments system
oversee commercial bank, credit institution => financial system
Objectives
Low and stable inflation
High real growth + Enployment
Stable financial markets and institution
Stable Interest rate + Exchange rate
Non-conventional Monetary policy tools
Asset purchases
Liquidity provision
Expansion of the central bank balance sheet => changing in composition of balance sheet => credit easing => improve function of credit market
Forward guidance
Fed commits to keep Fed Fund Rate at 0 for extended period => lower market expectations of future short-term IR => long term IR falls
Negative interest rate on Bank's deposits
encourage bank to lend out deposits kept at central banl => household and firm spend more => stimulate economy
Monetary policy influences the federal funds rate
Yes
No
Fed Fund rate
the rate at which banks lend each other overnight the amount of excess reserves in the accounts at Fed
Determination
Demand
Excess reserves are insurance against deposit outflows
opportunity cost of holding excess reserves = interest rate could have been earned - interest rate paid on these reserves
Downward sloping demand curve that becomes flat at interest rate paid on these reserves
if the federal funds rate is above the rate paid on excess reserves
the federal funds rate decreases
the opportunity cost of holding excess reserves falls
the quantity of reserves demanded rises
Product Just Launched So It Has Limited Features
Conventional Montary policy tools
Open market operations ( buy + sale securities)
Dynamic open market operations ( outright transaction)
intend to change reserves and monetary base
Defensive open market operation ( no change in MS)
Repurchase agreement (Repo)
Matched sale - purchase agreement (Reverse Repo)
ADVANTAGES
Complete control over the volume
Flexible and precise
Easily reversed if there is a mistake
Implemented quickly
Discount lending (discount policy)
Discount rate
Rate central bank lending money to banks
Discount loans
Primary credit (standing lending facility)
Healthy banks are allowed to borrowed all they want at very short maturities
1 % higher than the federal funds rate target
Secondary credit
financial trouble banks
0.5 % above the discount rate
Seasonal credit
seasonal problem (agriculture....)
Lender of last resort
prevent financial panics
creates moral hazard problem
ADVANTAGE
“lender of the last resort"
DISADVANTAGE
cannot control amount of money want to borrow
Reserve requirement (ensure liquidity)
RISE in reserve requirements => FALLS in the amount of deposits ( supported by monetary base) => MS decreases
same for all depository institutions
ADVANTAGES
Affect all banks equally
Powerful effect on money supply
DISADVANTAGES
Take time to implement
Costly to reverse
Cause liquidity problem
clearing house => offset payments of banks
lender of the last resort
Conventional monetary policy not effective when zero - lower - bound problem occurs => non convention one is necessary