Devint242 Essay

2026 words - 9 pages

Through fact and examples discuss the role central banks play in setting and monitoring general macroeconomic and monetary policy. How does the Central Bank of the Bahamas compare to the Federal Reserve System in the US.

The primary function of a central bank is to manage the nation's money supply through implementing monetary policies, through active duties such as managing interest rates, setting the reserve, and acting as a resort to the banking sector during times of bank insolvency or financial. The role of central banks also stem to determining controlling the nation's entire money supply, managing the country's foreign exchange and gold reserves and the Government's stock ...view middle of the document...

These required reserves are normally in the form of cash stored physically in a bank vault or deposits made with a central bank. The required reserve ratio is sometimes used as a tool in monetary policy, influencing the country's borrowing and interest rates by changing the amount of funds available for banks to make loans with. The higher the reserve requirement is set, the less funds banks will have to loan out, leading to lower money creation and perhaps ultimately to higher purchasing power of the money previously in use. . Most central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves. In 2007, in attempt to cut the circulation of Yuan in China and reduce there intense circulation, the People's Bank of China increased the banking reserve ratio by half a percentage point to 13.5%. This was a record high and the ninth rise in reserve requirements for that year. (BBC NEWS, 2007). In some countries such as India, there is the implementation of daily cash reserve ratios. Just Friday, the Reserve Bank of India’s Governor Raghuram Rajan on cut the percentage of cash reserve ratio (CRR) that banks must maintain with the central bank daily to 95% from 99%.

"This (maintaining high daily CRR) is made out to be a much bigger hardship than what we have seen through the past data," Rajan said on Friday after announcing the mid-quarter review of monetary policy. (The Economic Times, 2013).

According to the Federal Reserve site, the central bank of the United States, their reserve requirements are 3% on banks with  more than $12.4 million to $79.5 million in liabilities and 10% on banks with more than $79.5 million. This differs from the policy of the Central Bank of the Bahamas.  In accordance with the Central Bank of The Bahamas Act, 2000, banks are required to maintain primary reserves referred to as the 'Statutory Reserve', against their Bahamian dollar liabilities. Since coming into force in 1974, the ratio has been unchanged at 5.0%, although the Bank does have the authority to raise it to 20.0%.The Central Bank is also empowered to impose a secondary reserve, called the Liquid Asset Ratio(LAR), which mandates banks to maintain an average ratio of liquid assets in relation to their Bahamian dollar deposit liabilities. The LAR is currently set at 20.0% of demand deposits, 15.0% of savings and fixed deposits, and 15.0% of borrowings due to or from the Central Bank as well as inter-bank.

The usual aim of open market operations is to manipulate the short term interest rate and the supply of base money in an economy, and thus indirectly control the total effect of expanding money or contracting the money supply. The central bank exchanges money for the security, increasing the money supply while lowering the supply of the specific security. Open market operations usually include buying or selling securities to achieve an interest rate target in the...

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