Saturday, August 22, 2009

Functions of the Central Bank

The functions of the Central Bank differ from country to country in accordance with the prevailing economic situation. But there are certain functions which are commonly performed by the Central Bank in all countries. We have mentioned above such functions of the Central Bank narrated by De-Kock. Now let us discuss all these functions in detail.
1. Monopoly Over issuing Notes: The main objective of a Central Bank is to attain economic stability. Therefore, it has been entrusted with complete or partial monopoly powers regarding issuance of notes. This is the basic function of Central Bank. Because of this function they have been accorded as “Bank of Issue” for a long time.
2. Banker, Agent and Advisor to the Government: Central Bank provides same services to govt, which are provided by the commercial banks to their customers. As Central Bank keeps the deposits of all the govt. departments. Again the govt. expenditure is made through Central bank. As the salaries, pensions are paid to govt. employees from the State Bank of Pakistan in our country.
Central Bank advances short term loans (for 3 months) to govt, so that during such period govt may be able to have revenues in the form of taxes etc. Again Central bank helps govt. during wars and emergencies however central bank advances govt. for commodity operations where govt. has to purchase goods in bulk of amount. To have the public debt central bank serves as an agent to govt. It sells and purchases govt. securities it provides advisory services to govt. It guides govt. regarding different economic issues like devaluation of currency, adoption of fixed or flexible exchange rate system etc. It keeps a close link with the money market of a country. It helps govt. in making the decisions regarding amount of credit, targets of credits and allocation of credit in different sectors and regions. It is central bank which coordinates between fiscal and monetary policies so that the broader economic objectives could be realized.
3. Custodian of Foreign Exchange and Gold Reserves: Most of central bank has to keep gold while issuing notes. As a result all the gold reserves of a country are placed with the central bank. In addition to gold the foreign exchange reserves are also with central bank because most of countries have to exercise exchange control whereby the citizens of a country can not keep foreign exchange with themselves. Moreover the citizens of a country who are need of foreign exchange have to get it from central bank. All this means that whole of the foreign exchange reserves are in the possession of central bank.
4. Banker to Commercial Banks: Central bank is a banker to banks. Therefore it is the function of a central bank to establish a suitable and proper type of banking structure in the country. In this way, not only credit requirements of different sectors could be met, but the central bank could also be able to have a greater control over the activities of a commercial banks. Therefore all the commercial have to keep a certain proportion of demand and time deposits with central bank. With such reserves the central bank can influence the credit activities of commercial banks. The central bank recounts the bills of exchange offered by the commercial banks. In this way it provides loans to commercial banks. It also serves as a clearing house for the commercial banks.
5. Lender of the last Resort: The central bank serves as last resort for the commercial banks particularly when they do not have access to other sources. In addition to commercial banks, it also serves as lender of last resort for govt.
6. Controller of Money Market: The utmost function of central bank is to control money and credit, particularly it has to peek an eye on credit expansion. The changes in money and credit do have a variety of effects on the economy. Whenever the supply of money and credit exceedingly increase the purchasing power of money will decrease, leading to create inflation. Therefore, the central bank ahs to control credit for the sake of controlling inflation. For this purpose it exercises the monetary management. While during inflation central bank has to follow an easy monetary policy for the sake of removal of deflation.

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