Central Banks & Monetary PolicyEssay Preview: Central Banks & Monetary PolicyReport this essayCENTRAL BANKS & MONETARY POLICYName:Institution:Central Banks & Monetary PolicyObjectives of central banksIntroductionAs the new roles of central banks changed into agencies of public policy, there were underlying objectives that were infrequently stated. In the context it is used, an individual can conclude that objective that underlie all functions for the interest of the economy, is consistent with economic policy of the government. If compared to a case where objectives included both dimensions of public policy and commercial, such statement significantly increased the clearness of the direction given to bankers with central banks. There was an identity of logic of purpose. They were mandated with the role of discharging their functions in way that is related to the interest of the public, considering state agencies functions and coordinating them. It is to the degree that the interest of the public could be provided by addition of functions not assigned to the better (Callaghan, 2009). Hence, most central banks started to assume roles for financial sectors development; payment system oversight and money operation, foreign exchange, capital market and debt oversight. From the present objective, such an interest objective exposes itself to understanding and provides directions on what is to be done when views or functions as to nations interest. It is only in the recent past that attention has been awarded to objectives identification for function of individual and to objectives potential to conflict. Specifying objective trends have emerged but functions of many banks are not directed by legal objectives.
Objectives of Monetary PolicyPrice stability dominates the objective of monetary policy that is made specific in legislation. The stability of currency purchasing power is dominates legal objective. In most situations it is always superior to other objectives. In contrary, if stability of price is not specific, the legally specified objectives tend to be general. In fact, if the stability of price is not stated specifically as a goal, then there is no objective that legally dominates, and instead definition of value of currency is used (Cecchetti, 2011). There are conflicts which arise if various actions of monetary policies are driven by various objectives. For instance, objectives that regard stability of price and variables of real economy are concerned with such conflicts. Secondly, is about rate of exchange regimes- local stability of price and stability in exchange rate requires adjustment of interest rates in directly opposite positions.
The conflicts raises interpretation issues of objectives that are legal where both currency and price stability are specific as objectives of monetary policy. If the stability in price would be equal to stability in currency then conflict potential would be solved. Other ways of solving potential conflicts are; making sure that precedence orders are among objectives, recognition of lower levels to be in a position to clarify and interpret legislations higher level, use of extra-statutory agreement which provide law interpretation on which central bank agree, and lastly, taking into accountability the technical feasibility.
Objectives Financial StabilityMost of central banks presume that financial stability have policy responsibility. In a few situations where central bank is faced with legal objective that is explicit for stability in finance, objective is of wide range and the responsibility of central banks far reaching. However, in other situations where there are well set objectives for functions of financial stability, the languages implication is an extent of results responsibility, with these banks charged with stable, safe or sound system of finance. Making a financial stability specific entails confrontation of issues discussed relating them to objectives of monetary policy. It is not an objective that is absolute- financial stability is always flexible. The extent is what varies. There is no standard way to the measurement of financial stability and this complicates its intention and if achievement of appropriate sum is reached (Callaghan, 2009). Tradeoffs are to be taken into account. It entails dynamic and allocative efficiency of intermediation of finance. Secondly, there is another that entails potential incompatibility compared to other objective policy. Separate from being last resort lender, up to date there are no instruments of monetary policy that is suitable for the role of safeguarding stability in finance. The instruments in charge of this role have got other tasks which are inclusive of money stability interest rates; regulation of finance for efficiency of market and micro stability and institutional; and micro soundness or institutional prudential supervision. Diversion of those instruments from the basic purpose entails unintended consequences risk and trade off. Recent events sufficiently illustrate these issues.
Ideally objective statements would specify a suitable treatment of trade-offs if they arise. Many a times central banks are externally focused to take into account efficiency of the economy in their acts. But the directions to take into account efficiency do not clarify wholly the intended action in any case they are challenged by a trade-off. The extent of stability and trade-off remains open. When financial and monetary stability objectives clash, laws of many central banks go silent on the way of balancing arising risks from trade-offs. Partially, the silence stands for inadequate knowledge of involved underlying mechanisms. And partially, may imply trade-offs that have complex directions. Among the mechanisms used in the treatment of trade-offs that are mentioned in monetary policy discussions was found out to be conflicting items (Callaghan, 2009).
Objectives of the Payment SystemsAn objective which relates to oversight function of payment system if frequently found in the law of central banks, particularly if the law had been written again ten years ago. Nevertheless, objective statements are always general. Their supervision on operation of payment system and clearing and satisfaction that is sound and efficient. In this area of policy there are tradeoffs, efficiency versus robust. Hence, much foregone discussions that relate to objectives of financial stability also apply here. The statutory statements increase in use to provide extended specificity to policy frameworks and their related objectives. The reserve policy of the federal
e, for instance, is highly detailed and often contains more than the entire body of law, but the general guidance of the central bank concerning the financial stability of the Federal Reserve Board, a central bank for the Treasury is not included in the central currency policy of the Federal Reserve on a daily basis. The federal reserve policy, however, contains three main sections. The first section sets out all policies and objectives of the monetary system generally which is a basis for setting current and future central bank policy. The second section covers various financial, economic and regulatory policy objectives, including: (A) An integrated Federal Reserve and the Federal Deposit Insurance Corporation; (B) An intergovernmental approach to the federal government’s role in setting interest rate policy; (C) A financial management system for policy management of loans in the private banks and public and private funds, as well as the implementation of a Federal Reserve Bank of New York policy; and (D) An interagency and intergovernmental approach to the federal government’s role in the financial regulatory activities of the federal banking system. The last section sets out all of the activities of special committees, including the appointment and enforcement of central banks by any president, federal or state agency, or by the head of any state agency or agency, as well as by committees, and the procedure by which central banks are authorized to perform their functions. The central bank must also comply with the provisions of sections (e) and (g) of this directive, which specify that special committees can act only to fulfill the functions authorized to them by the Federal Reserve Order. At the same time, there can be no ambiguity about the authority given to special committees, either by the Executive Branch or the Congress. In the case of the Federal Reserve, the term “special committees” means all committees of the federal financial system. The term “financial management system” is used only when the Federal reserve system is to be evaluated as the only system to which monetary policy functions, which are to be fully consistent with the Federal Reserve’s objectives. The term “national banking system” has not previously been defined by the International Monetary Fund or the International Monetary Fund. An interagency policy may be adopted by an intergovernmental committee only to carry out its functions, or the government of an intermediate country or any intermediate country, to the maximum extent permitted by law. Such a policy can be formulated by an interagency or intergovernmental committee except as provided in this directive:
In order to ensure an effective implementation of the national banking system in accordance with the directive in this directive, the Central Banking Board shall consider any policy objectives that it deems necessary. The Committee shall consider the following before implementing a policy that in any way will affect the monetary policy performance of the current and planned federal funds rate, the national financial regulatory system, foreign exchange reserves or the national bank financial system: (1) In a fiscal period which is