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Central banks & monetary policy

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Herold k.
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  1. Introduction
  2. Objectives of central banks
  3. Objectives Financial Stability
  4. Objectives of the Payment Systems
  5. Money Supply and Bank Roles in Money Supply
  6. Determination of Money Base
  7. Monetary Control Tools
  8. Price Stability and Other Goals
  9. Money Supply and Price

Most of central banks presume that financial stability has policy responsibility. In a few situations where the central bank is faced with legal objective that is explicit for stability in finance, objective is of a 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 language's 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 a 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 the 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.

[...] The deposits can be converted to the currency. Both the deposits and currency add up to the monetary base that is a liability to Fed in its monetary unit. Often, some banks put base money into use as a partial reserve and extend money supply circulation with a big amount. Reserve Requirement Bank control on monetary control is done by authorities. Implementation of monetary policy can be done by change of proportions of the assets commercial banks should hold as reserves with the Fed. [...]

[...] Many a time's 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. [...]

[...] Performance of the UAE central bank The exchange rates that are fixed in UAE led to inflationary pressures since the year 2004. Excess money fueled boom that was ultimately followed by UAE bust in 2009. An exchange rate that is floating targeting inflation policy moderated price bubbles and stabilizes output and the rising inflation of UAE. The UAE seems not to be aware of their negative rates of real interest and the disaster that might be approaching it (Taylor, 1999). [...]

[...] Monetary and money economy enable efficient transactions. In the process of supply of money, the main players are depositors, the Fed and banks. A bank is an establishment which accepts individuals' or firms' deposits and then makes investment of the takings in loans and securities. It must then hold part of the deposits as reserves. The other remaining part that is not reserved is channeled to investment. This move always leads to the expansion of the sum of money supply (Friedman, 2006). [...]

[...] Therefore, it is vital for determination of money quantity. There have been debates on the instruments that are supposed to in the money supply definition. The two common definitions from Fed are; M1 is inclusive of checkable deposits, travelers, currency and demand deposits M1= Dc + C and M2 consists of repurchase agreements, time deposits, accounts of money markets and saving deposits plus M1. M2= M1 + Dt Assuming that excess reserves, currency, and time deposits all increase uniformly with deposits, then when these deposits change, other classes will change uniformly. [...]

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