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What is inflation targeting?
Central banks such as the Fed prefer that inflation remains stable over the long run. Most central banks practice flexible inflation targeting, to achieve that end. Constant inflation would deliver a zero output gap (meaning that the real level of output is equal to the potential level of output). High inflation is often detrimental to an economy. Businesses and households must divert time and money to hedge against inflation. For example, retail stores must incur the cost of changing thousands of sticker prices on their shelves and in their computers. Severe types of inflation can reduce real output, thereby increasing unemployment. However, when the price level stagnates (meaning little or no inflation), economies are at risk of a deflationary spiral. When this happens, prices and production fall drastically. To balance between these extremes, central banks practice inflation targeting. Currently, the Fed holds a target of around 2% inflation per annum.
What is inflation rate targeting?
Central banks such as the Fed prefer that inflation remains stable over the long run. Most central banks practice flexible inflation targeting, to achieve that end. Constant inflation would deliver a zero output gap (meaning that the real level of output is equal to the potential level of output). High inflation is often detrimental to an economy. Businesses and households must divert time and money to hedge against inflation. For example, retail stores must incur the cost of changing thousands of sticker prices on their shelves and in their computers. Severe types of inflation can reduce real output, thereby increasing unemployment. However, when the price level stagnates (meaning little or no inflation), economies are at risk of a deflationary spiral. When this happens, prices and production fall drastically. To balance between these extremes, central banks practice inflation targeting. Currently, the Fed holds a target of around 2% inflation per annum.
What are the function of the central bank in Ghana?
1)it is banker to banks 2)lender to the banks
What is monetry policy?
Defination: Monetary policy is the oldest policy for the economic stability. It is a policy which is adopted by the central bank of the country to control the supply of money: We can say that all those methods which are adopted by central bank, of the country to control the supply of money are called the monetary policy. In simple words, monetary policy means monetary management. In the words of Harry G. Johnson, "It is a policy of central bank to control the supply of money with the aim of achieving macroeconomic stability". Tools Of Monetary Policy They are classified into 1. Quantitative Methods 2. Qualitative Methods 1. Quantitative Methods: They consists of those methods which Physically affect the amount of credit creation in the economy. They are as: 1) Changes in Bank Rate Policy or Rediscount Rate: The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate, In Pakistan; State Bank charges 10% as bank rate. By changing such rate of interest, the central bank can influence the supply of money in the country. To control inflation the central bank increases the rate of interest. The commercial banks will also increase their rate of interest. Accordingly, the loans will decrease, investment, output and prices will fall. In this way, inflation will be controlled. Now, we assume that the country is facing deflation. To remove deflation central bank will decrease the bank rate, the commercial banks will also decrease the rate of inl91'Cst. In this way, people will get more loans. Investment production, employment and Prices will start rising up. Accordingly, deflation will be controlled. Limitations: But the success of the bank rate policy depends upon * The fact that how flexible is the economic system. How rapidly, there will be the effect of bank rate on other variables of the economy, like prices, wages, Interest and output, etc. * Commercial banks should abide by the instructions of the central bank. If the central bank brings changes in the rate of interest, the commercial banks should also change the rate of interest. * If commercial banks already have excess reserves then commercial banks will not depend upon central bank. It this way, they will not care for changes in the rate of interest from central bank. * If economic activity is flourishing or economy is having boom, then the business class will be prepared to pay even higher rate of interest and inflation will not to be controlled. 2) Open Market Operation .. This is the second instrument of the monetary policy. Under this technique, the central bank sells or purchases 'government securities. If the central bank finds that commercial banks are providing excessive loans which are creating inflation. To remove the inflation, the central bank sells the government securities. The commercial banks will purchase these securities to earn interest against such securities. In this way, the resources of commercial banks will go down. They will advance less loans. Accordingly, the inflation will be controlled. If there is deflation in the economy. To control the deflation, the central bank purchases the government securities. Then the monetary base of the commercial banks will increase their loaning power will increase. As a result, investment will increase, income and prices will go up. LimitationsThe problem is that, in most of the countries the money market is not organized where the securities could be sold or bought. The funds which are collected through sale of government securities should not be spent on unproductive fields. 3) Changes in Reserve Requirements Each commercial bank has to keep a certain proportion of its deposits in the form of reserves just to meet the demands of the depositors. As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors. The central bank can influence this reserve rate. If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. Accordingly, commercial banks could advance less loans. On the other hand, in deflation, if the central bank reduces the reserve requirements, the commercial banks will be able to advance' more loans. Hence, deflation could be removed. 4) Changes in Reserve CapitalEach commercial bank has to keep a certain ratio of its deposit with central bank. In case of Pakistan, each commercial bank has to keep 5% of its deposit in the central bank. By changing the reserve capital, a central bank can control the supply of money by commercial banks. When there is inflation in the economy. To remove this inflation, the central bank will increase the reserve ratio. As a result, lending of commercial banks will fall. As a result the supply of money will decrease. On the other hand, if central bank decreases the 'reserve ratio, the commercial banks will be having more funds to advance. Accordingly, the deflation could be controlled. 5) Changes in Marginal Requirements Commercial banks do not give loans against leaves, rather they ask for pledges to make. How much a person will have to pledge is settled by the central bank. This is given the name of marginal requirement. The central bank can bring changes in the marginal requirements. If there is inflation in the economy, the marginal requirements will increase. In this way, people will get less loans. As a result, supply of money will decrease. During deflation the marginal requirements are decreased. Hence people will get more loans from the commercial banks. As a result supply of money will go up and deflation will be controlled. 6) Credit Ceiling/Rationing of Credit The central bank can issue directions that loans will be given to commercial banks upto a certain limit. As a result, the commercial banks-will be careful in advancing loans to the people. But this is a very strict method, hardly adopted by the central bank. Moreover, if the commercial banks are having other sources to borrow, they will not bother for this policy. 2) Qualitative Methods * Moral Suasion: It is concerned with just as a moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation. Loans should not be given for speculative purposes and hoarding. But such like requests could be effective in the developed countries. * Consumers Credit Control: This instrument is applied during inflation. If the central bank wants to control the supply of money, it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables because they create inflation. * Direct Action: The instrument of direct action is concerned with the policy of central bank against commercial banks. It can refuse to give loans to commercial banks. The central bank will not advance loan to commercial banks for the sectors which create inflation. Moreover, if commercial banks do not follow the instructions of the central bank, It will refuse to lend commercial banks * Publicity: The central bank of the country is the overall in charge of economic stability of the country. Its aim is to protect the economy from inflation and deflation. For this purpose, it analyses the whole economy. It keeps an eye over the activities of the commercial banks. If the commercial banks are found advancing loans which create inflation, their activities will be unhealthy for whole economy. The central bank can black list such banks. Thus to avoid such bad reputation in' future, they will be careful in advancing loans. By: Shafaq Chohan
How does monetary policy determine exchange rate?
the ability of a country to make its own money and to set its own interest rates. the supply of money and interest rates. MONETARY POLICYMonetary policy is the oldest policy for the economic stability. It is a policy which is adopted by the central bank of the country to control the supply of money: We can say that all those methods which are adopted by central bank, of the country to control the supply of money are called the monetary policy. In simple words, monetary policy means monetary management. In the words of Harry G. Johnson, "It is a policy of central bank to control the supply of money with the aim of achieving macroeconomic stability". Tools Of Monetary Policy They are classified into 1. Quantitative Methods 2. Qualitative Methods 1. Quantitative Methods: They consists of those methods which Physically affect the amount of credit creation in the economy. They are as: 1) Changes in Bank Rate Policy or Rediscount Rate: The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate, In Pakistan; State Bank charges 10% as bank rate. By changing such rate of interest, the central bank can influence the supply of money in the country. To control inflation the central bank increases the rate of interest. The commercial banks will also increase their rate of interest. Accordingly, the loans will decrease, investment, output and prices will fall. In this way, inflation will be controlled. Now, we assume that the country is facing deflation. To remove deflation central bank will decrease the bank rate, the commercial banks will also decrease the rate of inl91'Cst. In this way, people will get more loans. Investment production, employment and Prices will start rising up. Accordingly, deflation will be controlled. Limitations: But the success of the bank rate policy depends upon * The fact that how flexible is the economic system. How rapidly, there will be the effect of bank rate on other variables of the economy, like prices, wages, Interest and output, etc. * Commercial banks should abide by the instructions of the central bank. If the central bank brings changes in the rate of interest, the commercial banks should also change the rate of interest. * If commercial banks already have excess reserves then commercial banks will not depend upon central bank. It this way, they will not care for changes in the rate of interest from central bank. * If economic activity is flourishing or economy is having boom, then the business class will be prepared to pay even higher rate of interest and inflation will not to be controlled. 2) Open Market Operation .. This is the second instrument of the monetary policy. Under this technique, the central bank sells or purchases 'government securities. If the central bank finds that commercial banks are providing excessive loans which are creating inflation. To remove the inflation, the central bank sells the government securities. The commercial banks will purchase these securities to earn interest against such securities. In this way, the resources of commercial banks will go down. They will advance less loans. Accordingly, the inflation will be controlled. If there is deflation in the economy. To control the deflation, the central bank purchases the government securities. Then the monetary base of the commercial banks will increase their loaning power will increase. As a result, investment will increase, income and prices will go up. LimitationsThe problem is that, in most of the countries the money market is not organized where the securities could be sold or bought. The funds which are collected through sale of government securities should not be spent on unproductive fields. 3) Changes in Reserve Requirements Each commercial bank has to keep a certain proportion of its deposits in the form of reserves just to meet the demands of the depositors. As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors. The central bank can influence this reserve rate. If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. Accordingly, commercial banks could advance less loans. On the other hand, in deflation, if the central bank reduces the reserve requirements, the commercial banks will be able to advance' more loans. Hence, deflation could be removed. 4) Changes in Reserve CapitalEach commercial bank has to keep a certain ratio of its deposit with central bank. In case of Pakistan, each commercial bank has to keep 5% of its deposit in the central bank. By changing the reserve capital, a central bank can control the supply of money by commercial banks. When there is inflation in the economy. To remove this inflation, the central bank will increase the reserve ratio. As a result, lending of commercial banks will fall. As a result the supply of money will decrease. On the other hand, if central bank decreases the 'reserve ratio, the commercial banks will be having more funds to advance. Accordingly, the deflation could be controlled. 5) Changes in Marginal Requirements Commercial banks do not give loans against leaves, rather they ask for pledges to make. How much a person will have to pledge is settled by the central bank. This is given the name of marginal requirement. The central bank can bring changes in the marginal requirements. If there is inflation in the economy, the marginal requirements will increase. In this way, people will get less loans. As a result, supply of money will decrease. During deflation the marginal requirements are decreased. Hence people will get more loans from the commercial banks. As a result supply of money will go up and deflation will be controlled. 6) Credit Ceiling/Rationing of Credit The central bank can issue directions that loans will be given to commercial banks upto a certain limit. As a result, the commercial banks-will be careful in advancing loans to the people. But this is a very strict method, hardly adopted by the central bank. Moreover, if the commercial banks are having other sources to borrow, they will not bother for this policy. 2) Qualitative Methods * Moral Suasion: It is concerned with just as a moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation. Loans should not be given for speculative purposes and hoarding. But such like requests could be effective in the developed countries. * Consumers Credit Control: This instrument is applied during inflation. If the central bank wants to control the supply of money, it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables because they create inflation. * Direct Action: The instrument of direct action is concerned with the policy of central bank against commercial banks. It can refuse to give loans to commercial banks. The central bank will not advance loan to commercial banks for the sectors which create inflation. Moreover, if commercial banks do not follow the instructions of the central bank, It will refuse to lend commercial banks * Publicity: The central bank of the country is the overall in charge of economic stability of the country. Its aim is to protect the economy from inflation and deflation. For this purpose, it analyses the whole economy. It keeps an eye over the activities of the commercial banks. If the commercial banks are found advancing loans which create inflation, their activities will be unhealthy for whole economy. The central bank can black list such banks. Thus to avoid such bad reputation in' future, they will be careful in advancing loans. By: Shafaq Chohan
Functions of central bank?
There are many functions of the central Bank. 1. it has the right to note issu. 2. it is the bank of the gobernment. 3. it is the advicer for the governmant to regulat the new money policies. 4. it is the last help for the commercial banks in case of thier financial crisis. 5. it provides the remittence facility. 6. it provides the facility of currency exchange. 7. it is responsible for the economic growth.. 8. it regulaytes the laws to balance the inflation and deflation in the economy.
Is inflation always bad for economy?
Inflation is certainly not always bad for economy, in fact a moderate level of inflation matching to it's growth rate is good for the country. Moderate inflation suggest demand in the system while no inflation or deflation suggest demand collapse which is much more dangerous than Inflation. For Instance US inflation is 1.5 to 2% while it's growth is 2-3%. This equation is ok. A Country having an inflation equal to it's growth rate is not bad though it is always preffered to have lower inflation and high growth rate. But it is difficult to achieve on a continuous basis. Reserve banks all over the world prefer and try hard to have moderate inflation and would worry if there is a situation of deflation. But too high inflation will make the currency of the country very weak against the major global currencies and will bring the economy to it's knees, like what happened in case of Zimbabwe.
How will the repo rate affect home loans?
Repo rate is the rate at which the banks can get loans from the country's central bank. If the rate at which banks get loans from the central bank goes down it would automatically affect the rate at which home loans are being granted. Say the repo rate is 6% then the banks may keep a margin of 4% and grant home loans at 10%. If the central bank opts to reduce the repo rate by 2% then the banks would have to pass on this benefit to the end customer. Hence the home loans would be available to the public at 8%.
How many there is in Banks in Ethiopia?
Ethiopia has 2 of the top banks in Africa. That doesnt mean Ehtiopia has only 2 banks but 2 of the banks in Ethiopia are the top of Africa.
What are the role of central bank in economic development?
Banks are financial institutions that can make or break an economy. Unsupervised and uncontrolled behavior from banks can spell doom to the economy and for the customers as well. Hence central banks like the Reserve Bank in India or the Federal Reserve in USA monitor the functioning of all banks in their jurisdiction and ensure that they function in a just fashion and customers stand to benefit at all times. Each country has a central bank that supervises the banks that operate in that country They set policies like: 1. Minimum Deposit Rates 2. Loan Rates 3. Cash Reserve Ratio and other regulatory ratios 4. etc
What is KIBOR rate in Pakistan?
It is Karachi Inter Bank Offer Rate (KIBOR), given by specialized institution on daily, weekly, monthly and on 1, 2 and 3 yearly basis to all the commercial banks of Pakistan so that they charge interest to their customers on that basis. This rate is inflation adjusted rate and then banks by adding 2 or 3% in KIBOR rate charge their customers for their profit.
What is Zero inflation and Mild inflation?
Zero inflation is where the economy reach a state of 0% inflation rate. This is not really good in the sense that it shows the economy is stagnant/not growing. This may turn away the investors. Mild inflation is basically low rate of inflation around 2% to 3%. Mild inflation shows that an economy is stable and indicates economic growth.
