Role of Central Banks And Monetary Policy - Essay Prowess

Role of Central Banks And Monetary Policy

Role of Central Banks And Monetary Policy

Role of Central Banks And Monetary Policy


A central bank refers to a monopoly and a nationalised institution which has the responsibility of producing and distribution credit and money. Currently, the central banks formulate monetary policy. The central banks are anticompetitive and are neither government agency for purposes of ensuring that the institution remains politically independent.  Among the first prototypes of the modern central bank is the Bank of England which was established in the 17th century. The bank of England was also the first central bank to exercise the duty of lender of last resort for other commercial banks. Other central banks that were popular were the Reich bank of German and Napoleon’s Bank of France. The two institutions were set up to finance military operations of the government which were expensive. The European central bank managed to facilitate the smooth running of the economy evident through the ability of the government to pay wages. Such significant contribution of central banks challenged other nations to establish similar institutions to grow their economy. Currently, most of the nations have established their local central banks with regional unions like the European Union creating the European Central Bank[.Some of the central banks include the Bank of France, Bank of England and the Deutsche Bundesbank. The banks are charged with the responsibility of formulating favourable economic policies.

The role of central banks and monetary policies

The central banks and the fiscal policies control the money supply in the economy. The government regulates the quantity of money to keep inflation within the required rates. Mesures of increasing the amount of cash include, the central bank buying back the government bonds and bills. When they purchase them, they pay the bearers of the instrument then spend the money by paying for goods and services. Through expenditures, more money circulates within the local economy. On the other hand, when the supply of money is more than the economy, the bank issues the financial instrument and through paying the bills and bonds the banks reduce the currency in circulation (Adler, Castro, & Tovar,2016, p.184)

Also, the central banks promote economic growth by ensuring that there is an adequate supply of financial resources in the economy. Therefore, the central bank engages in monetary expansion policies to supply more money to the market. Besides, the central bank can provide funds to initiate investment in the public sector. The central bank also regulates the services offered by other financial institution. The regulation is to ensure that the firms never use the client money in risky investments which are profitable for the financial institutions alone.

The background and early history of the European Monetary System

The Monetary System was established in the year 1979 to replace Bretton Woods Agreement in 1972. The new system was necessary because of th

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