Question

Find information on the central bank in the US and find the comparable institution for the country you have chosen. What role does the central bank play in each country; how much power does it have, independent of the government? In other words, who makes the monetary policy decisions in each country? Provide an explanation of the material that you present. In particular, discuss how monetary policy is undertaken in the country and the central bank's role in this. What types of institutions does this central bank have to affect the working of the economy (just as an example, are there groups like the FOMC in the country you have chosen).

Answer 1

Central bank in US - Federal Bank

Central bank in India - Reserve Bank of India

Role of central bank - Price stability (for both countries)

Independent of government intervention? No.

Should be independent? Yes.

There is always a tusle between government and central banks. This is because governments objective is economic growth, while central banks objective is price stability. So, government wants central banks to increase liquidity, but central bank increasing liquidity will lead to inflation. So, the objective of central bank will not be met, if government interferes. So, there should be a balance between economic growth and price stability.

Monetary policy in any country is of 2 types

1. Expansionary monetary policy (increasing liquidity) -> inflation increases

2. Contractionary monetary policy (decreasing liquidity) -> inflation decreases

Tools used are

1. Reserve requirement

2. Open market operations

3. Policy rate

Apart from inflation targeting, central banks also perform the task of exchange rate targeting.

In United states, exchange rates are independently floating, while in india it is managed floating.

If trade balance, employment problems are increasing due to depreciation of Indian Rupee, then RBI intervenes and try to stop depreciation of Indian Rupee, by using foriegn bonds. No such need for Federal bank.

FOMC kind of groups are not present in India. RBI looks over the open market operations in India, unlike FOMC in US.