Functions of the central bank, Microeconomics

Functions of the Central Bank:

Currency issue and distribution: The Central Bank is the only institution empowered by law to issue currency notes and coins that are used as a medium of exchange in the country. The monopoly power of issuing legal tender currency is important to control the supply of money in order to prevent inflation.

The bankers’ banks: The Central Bank provides facilities for other banks, especially commercial banks to keep their cash reserve and clear their balance through clearing house. It also grants loans to or discount the bills of commercial banks when they are short of fund; hence the Central Bank is referred to as ‘lender of last resort’.

Banker to the government:The Central Bank keeps the accounts of the government and of all its corporations and agencies. It receives all payments due to the government, as well as undertake borrowing on behalf of the government through the issuance of short-term securities e.g. treasury bills and treasury certificates, and long-term securities – e.g. development stocks. The Central Bank is also responsible for the management of domestic and external debts of the government.

Promotion of monetary stability: The central bank controls money supply in the economy to promote price stability.This involves the use of instruments of monetary policy such as open market operation (OMO), reserve requirements, discount rate, etc.

Posted Date: 1/3/2013 1:40:32 AM | Location : United States

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