Central Bank Essay

1074 words - 5 pages

2.1 Introduction
The central bank, Bank for Banks, Lender of last resort or Bank of the government; can be defined as a government institution that manages and supervises a country's banking sector. The central bank brings about the country's monetary policy through utilizing the various monetary tools: open market operations, discount rate and the required reserve ratio. Those tools are of vital importance in the process of combating the two economic phenomena that any economy in the world encounters: inflation and unemployment, and thereby enhancing the economic situation and mitigating potential financial conflict. Therefore, a solid central bank in Palestine is highly indispensable for ...view middle of the document...

Monetary policy is divided into 5 approaches: expansionary, contractionary, countercyclical, rule based and discretionary monetary policy. Each type of them is used based upon the severeness of the economic situation of either the inflation level or the unemployment level of a particular country. Along with that, the most important function of the central bank is to stabilize the economy (Faille, Christopher O'connor, David E., 2000), and this can be reached by using one of the monetary tools: First; "Discount rate: the discount rate is the interest rate charged by the central bank to member banks, other depository institutions, and the government for loans". Second; Open market operations: selling or purchasing government securities in order to affect the money supply in an economy. And lastly the required reserve ratio: a required ratio on banks' reserves that is required to be deposited in the central bank. By reviewing the Palestinian monetary authority's official statement regarding the monetary stability in Palestine, we quote;" Although the attainment of monetary stability is linked with the issuing of a national currency, the PMA exerts relentless determination in finding a path to stability in Palestine. They do so by conducting practical operations and distributing the necessary analytical and informative frameworks for the formulation and implementation of a monetary policy."

2.3 liquidity assurance techniques
Liquidity assurance is the assurance of having access to international liquidity when needed. (Moessner, Richhild, 2010). The central Bank calibrates the measures undertaken so as to restore normalcy to financial flows, it closely and continuously monitors liquidity conditions and will take actions as appropriate. First, multilateral techniques "involve a group of countries agreeing to make funds available to each other in case of need"( Allen, William A.) participating countries can draw the funds they need from a pooled reserve, those reserves could be used in a crisis to provide foreign currencies to banks in any of the participating countries. An example of multilateral techniques providers is the international monetary fund (IMF). Second, Bilateral technique: "focusing on individual members policies such as accepting foreign currency as a collateral located outside home territory from commercial banks" (Zhang, Peter G) this type involves three techniques; the first is swap network managed by reserve currency country, the second one comprises of individual...

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