Central Bank Flashcards
What is the central bank?
It is the authority responsible for the monetary policy of a country. Its primary responsibikity is to maintain the currency stability.
What are the roles of a central bank?
CB’s actions affect the interest rates, the amount of credit and the money supply
CB acts as a lender of last resort for the banking system
It has supervisory powers
It offers services to the government
What are CB’s resposibilities?
Currency issuance: it is the only issuer of currency and it can set conditions under which banks borrow from CB
Monetary and exchange rate policy: establishes monetary policy and maintains price stability
It is the bank of the banks
It is the bank of the government
It ensures financial stability
Regulates and supervises the payment system
Collects information and publishes statistics
What is the national bank of Romania?
It is an independent public institution, being the only institution with the power to issue Romanian currency.
Its primary objective is maintaining price stability.
What is the monetary policy?
It is the process by which the CB controls the supply of money, the availability of money and the cost of money (interest rate).
What are the types of monetary policy?
MP can be expansionary (increases the MS) and contractionary (decreases the MS).
What are the objectives of monetary policy?
The objectives are: economic growth, full employment, low inflation, exchange rate stability
What is the nominal anchor?
It is a nominal variable that policymakers use to tie down the price levels.
What are the benefits of price stability?
- improved CB credibility and transparency
- higher long-term growth
- money can fulfill its obligations better
- reduces the risk of deflation
What is monetary targeting?
It is the strategy by which CB can control the M0, by controlling the banks’ reserves.
What are the advantages of monetary targeting?
It enables CB to adjust its monetary policy to focus on domestic considerations
It enables the CB to set goals for inflation
It can send immediate signals to the public
It is easier for CB to control M0 and M1 rather than inflation
What are the disadvantages of monetary targeting?
It is highly likely to fail
Predictions are rather unstable
M2 and M3 are less controllable
What is the exchange rate targeting?
It is fixing the value of the domestic currency to that of a low inflation country.
What are the advantages of exchange rate targeting?
The nominal anchor contributes to keeping inflation low
It is simple and clear
It mitigates time inconsistencies
What are the disadvantages of exchange rate targeting?
The targeting country can no longer pursue its own monetary policy.
The shocks from the anchor country are transmitted to the targeting country.
Vulnerability caused by crises is higher.
Low inflation seems to be unattainable.
