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

Hy An

Central Bank

Hy An

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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

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