Monetary Policy And Central Banks Essay
Monetary policy and central banks plays a major role in the economy of the world by ensuring that the is supply of money at the interst level that is reasonable for all the countries to manage their economy
Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve?
The link between the money and monetary policy can create tension with central banks other objectives due to the fact that reserves play a vital role in the economy. Since reserve balances are used to make interbank payment and this meant that they serve as a final setlement for array of transactions . This may mean that the quantity of reserves needed for payment purpose far exceeds the quantity consistent with central bank’s interest rate. This would mean that the central bank would have to perform a balancing act which will increase the supply of reserve during the day for payment purpose through day light reserves and then shrinking the supply back at the end of the day to try and be consistent with desire market interest rate. It must be noted that central banks provide daylight reserves by lending directly to the banks which may expose the central bank to substantial credit risk or even generate moral hazard whereby regulators would be reluctant to close financially troubled bank. An example is the september 11, 2001, where the FED provided an usuallly large quantity of reserves in order to promote efficient functioning of the payment system…