Central Banks & Monetary Policy

CENTRAL BANKS & MONETARY POLICY

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Central Banks & Monetary Policy

Objectives of central banks

Introduction

As the new roles of central banks changed into agencies of public policy, there were underlying objectives that were infrequently stated. In the context it is used, an individual can conclude that objective that underlie all functions for the interest of the economy, is consistent with economic policy of the government. If compared to a case where objectives included both dimensions of public policy and commercial, such statement significantly increased the clearness of the direction given to bankers with central banks. There was an identity of logic of purpose. They were mandated with the role of discharging their functions in way that is related to the interest of the public, considering state agencies' functions and coordinating them. It is to the degree that the interest of the public could be provided by addition of functions not assigned to the better (Callaghan, 2009). Hence, most central banks started to assume roles for financial sector's development; payment system oversight and money operation, foreign exchange, capital market and debt oversight. From the present objective, such an interest objective exposes itself to understanding and provides directions on what is to be done when views or functions as to nation's interest. It is only in the recent past that attention has been awarded to objectives identification for function of individual and to objectives potential to conflict. Specifying objective trends have emerged but functions of many banks are not directed by legal objectives.

Objectives of Monetary Policy

Price stability dominates the objective of monetary policy that is made specific in legislation. The stability of currency purchasing power is dominates legal objective. In most situations it is always superior to other objectives. In contrary, if stability of price is not specific, the legally specified objectives tend to be general. In fact, if the stability of price is not stated specifically as a goal, then there is no objective that legally dominates, and instead definition of value of currency is used (Cecchetti, 2011). There are conflicts which arise if various actions of monetary policies are driven by various objectives. For instance, objectives that regard stability of price and variables of real economy are concerned with such conflicts. Secondly, is about rate of exchange regimes- local stability of price and stability in exchange rate requires adjustment of interest rates in directly opposite positions.

The conflicts raises interpretation issues of objectives that are legal where both currency and price stability are specific as objectives of monetary policy. If the stability in price would be equal to stability in currency then conflict potential would be solved. Other ways of solving potential conflicts are; making sure that precedence orders are among objectives, recognition of lower levels to be in a position to clarify and interpret legislation's higher level, use of extra-statutory agreement which provide law interpretation on which central bank agree, and lastly, taking into accountability the technical feasibility.

Objectives Financial Stability

Most of central banks presume that financial stability have policy responsibility. In a few situations where central bank is faced with legal objective that is explicit for stability in finance, objective is of wide range and the responsibility of central banks far reaching. However, in other situations where there are well set objectives for functions of financial stability, the language's implication is an extent of results responsibility, with these banks charged with stable, safe or sound system of finance. Making a financial stability specific entails confrontation of issues discussed relating them to objectives of monetary policy. It is not an objective that is absolute- financial stability is always flexible. The extent is what varies. There is no standard way to the measurement of financial stability and this complicates its intention and if achievement of appropriate sum is reached (Callaghan, 2009). Tradeoffs are to be taken into account. It entails dynamic and allocative efficiency of intermediation of finance. Secondly, there is another that entails potential incompatibility compared to other objective policy. Separate from being last resort lender, up to date there are no instruments of monetary policy that is suitable for the role of safeguarding stability in finance. The instruments in charge of this role have got other tasks which are inclusive of money stability interest rates; regulation of finance for efficiency of market and micro stability and institutional; and micro soundness or institutional prudential supervision. Diversion of those instruments from the basic purpose entails unintended consequences risk and trade off. Recent events sufficiently illustrate these issues.

Ideally objective statements would specify a suitable treatment of trade-offs if they arise. Many a time's central banks are externally focused to take into account efficiency of the economy in their acts. But the directions to take into account efficiency do not clarify wholly the intended action in any case they are challenged by a trade-off. The extent of stability and trade-off remains open. When financial and monetary stability objectives clash, laws of many central banks go silent on the way of balancing arising risks from trade-offs. Partially, the silence stands for inadequate knowledge of involved underlying mechanisms. And partially, may imply trade-offs that have complex directions. Among the mechanisms used in the treatment of trade-offs that are mentioned in monetary policy discussions was found out to be conflicting items (Callaghan, 2009).

Objectives of the Payment Systems

An objective which relates to oversight function of payment system if frequently found in the law of central banks, particularly if the law had been written again ten years ago. Nevertheless, objective statements are always general. Their supervision on operation of payment system and clearing and satisfaction that is sound and efficient. In this area of policy there are tradeoffs, efficiency versus robust. Hence, much foregone discussions that relate to objectives of financial stability also apply here. The statutory statements increase in use to provide extended specificity to policy frameworks and their related objectives. The reserve policy of the federal