Role of Central Banks in Less and More Developed Economy

In developed nations, essential banks conduct a wide range like banking, regulatory, and supervisory functions. They have substantial public responsibilities et alii a broad clad from executive powers. Their major activities can be grouped into five general functions:

(1) Issuer of bread besides manager regarding inapplicable reserves: Central banks print money, distribute notes and coins, intervene in foreign-exchange markets to regulate the national currency’s rate regarding exchange including other currencies, and manage foreign-asset reserves to maintain the heteronomous value regarding the national currency.

(2) Banker to the government: Central banks provide bank deposit and borrowing facilities to the government while simultaneously acting that the government’s fiscal agent and underwriter.

(3) Banker to domestic popular banks: Central banks also provide bank deposit and borrowing facilities to mercantile banks and act as a lender of last resort to financially uneasy commercial banks.

(4) Regulator of domestic financial institutions: Central banks ensure that commercial banks and other financial institutions conduct their business prudently and in accordance with relevant laws and regulations. They also monitor reserve ratio requirements and supervise the conduct of local and regional banks.

(5) Operator concerning monetary and credit policy: Central banks attempt to manipulate monetary including credit policy instruments (the enchorial money supply, the discount rate, the foreign-exchange rate, commercial bank reserve percent requirements, etc.) to achieve major macroeconomic objectives such as controlling inflation, promoting investment, or regulating international change movements. Sometimes these functions are handled by separate regulatory bodies.

Central banks are capable of effectively carrying out their wide range regarding administrative and regulatory functions in developed nations primarily because these countries have a highly integrated, complex economy; a sophisticated et sequens mature financial system; and a highly educated, well-trained, and well-informed population. In developing countries, the situation is quite different. LDCs may be dominated by a tunnel vision range like exports accompanied by a much larger diversity of imports, the relative prices (the terms of trade) regarding which are likely to be beyond neighborhood control. Their financial systems tend to be rudimentary and characterized by:

(1) foreign-owned commercial banks that mostly finance domestic and export industries.

(2) An informal and often exploitive credit chain serving the bulk of the rural and informal urban economy.

(3) A central banking institution that may acquire been inherited from colonial rulers or operates either as a currency board issuing domestic currency for foreign exchange at fixed rates or simply to finance budget deficits.

(4) A money supply that is difficult to measure (because of currency substitution) and more difficult to regulate.

(5) An unskilled furthermore inexperienced workforce unfamiliar with the many complexities of domestic and transnational finance.

(6) A degree of legislative influence furthermore control by the central polity (over interest rates, foreign-exchange rates, import licenses, etc.) not usually found in more developed nations.

Under such circumstances, the principal task of a central bank is to instill a sense of confidence among local citizens and foreign trading partners in the credibility regarding the local currency as a viable and stable unit of account and in the prudence and responsibility of the domestic financial system. Unfortunately, many LDC central banks have confined control over the credibility of their currencies because fiscal policy – and large fiscal deficits – call the tune and must be financed either by printing money or through foreign or domestic borrowing. In either case, prolonged deficits inevitably lead to inflation and a disintegration of confidence in the currency. Given the substantial differences in commercial structure and financial sophistication between rich and poor nations, central banks in most of the least developed countries completely do not maintain the flexibility or the independence to undertake the range like monetary macroeconomic and regulatory functions performed by their developed-country counterparts.