Central Bank and Monetary Policy Research Paper

Central Bank and Monetary Policy - Research Paper Example The main reason why countries create their own central banks is to ensure control of their currency. The central bank is the only authority that can print money and such responsibility cannot be given to anyone else as the consequence may turn out to be disastrous. The role of the central bank evolved over time and the literature in monetary theory points out that central banks work to reduce the impact of economic fluctuations and to minimize volatility in the financial system. They pursue five objectives to ensure economic and financial stability. The goals of central banks are generally specified as price stability, stable real growth, financial stability, interest rate and exchange rate stability (Mankiw, 2011; Geraats, 2006, pp. 37-40). The main goal of this research project is to help understand how the central bank manages and controls the quantity of money in the economy and its relation to price stability. It also brings out the main tasks of central banks and the challenge they face in conducting monetary policy. Objectives of Central Bank: The major role of the central bank of any country in the world is to monitor the financial structure of the respective country. Central banks also control the volume of financial transactions which are made by all other banks in the economy. These other banks include commercial banks, other non-banking financial institutions. The most important objective of the central bank is to manage the amount of financial resources of the economy and thus to maintain the stability in the economy. This stability is maintained in the economy by the central bank of the country in respect to stability of prices of goods and services, stability of financial transactions and prices of these transactions. Also stability is required to be achieved by the central bank in terms of movements in nominal as well as real interest rates and stability in exchange rates. Finally, the most important role of the central bank is to maintain stabi lity in the real growth of the economy (Mankiw, 2011). Central banks of different countries have long been correlated with secrecy. Even in regard to the present trend toward higher level of transparency of different monetary policies, it can be said that, this has not dispersed the inscrutability with which all central bankers often argue. Various researchers have provided an economic explanation for different roles of oblique communication. Under the conceivable assumption that there exists imperfect common knowledge or information about the level of transparency, all economic outcomes have been decided by both actual as well as perceived transparency. It has been shown, in numerous researchers, that it can be helpful to merge actual transparency with the perceived opacity. The optimal or most efficient communication strategy for the central bank is related to the process of providing clarity about the target level of inflation. But the role of the central is also related to the p rocess of providing information with recognized ambiguity about the target of prevailing as well as expected output-gap and supply shocks. Therefore, â€Å"the central bank benefits from sustaining transparency misperceptions, which helps to explain why transparency of monetary policy has not eliminated the mystique of central bank speak† (Geraats, 2006, p. 38; Blanchard, 2007, pp. 69-75). Balance sheet of central bank: The balance sheet of the central consists of assets and liabilities.