Question

Write an essay about the role of the central bank in economic growth ?( 400-500 word )

Answer 1

In a developing economy the central bank performs traditional as well as non-traditional functions. The key conventional roles it performs are note issue monopoly, banker to government, banker banker, last resort lender, credit controller and stable exchange rate maintainer. Yet all these roles contribute to the primary role of assisting in the economic growth. The central bank in a developing country aims at promoting and sustaining a increasing level of the country's output, jobs and real income. In most underdeveloped countries, central banks have been granted large powers to support the development of those economies.

Financial institutions developing and expanding: One of a central bank 's aims in an underdeveloped country is to improve their currency and credit system. In order to provide greater credit facilities and funnel voluntary savings into productive channels, more banks and financial institutions are expected to set up. Financial institutions are based in large cities in underdeveloped countries and provide property, plantations with credit facilities. To counter this, the central bank would expand branch banking to rural areas to provide credit to peasants, small business people and traders.

Proper accommodation between demand and money supply: Central bank plays a major role in bringing about a proper balance between demand and money supply. Preis amount represents an disparity between the two. A lack of supply of money will hinder growth while an surplus of it will result in inflation. As the economy grows, demand for money is likely to rise as the non-monetary sector slowly monetizes, and Improved production and prices of agricultural and industrial goods.

A appropriate strategy on interest rates: The interest rate structure in an underdeveloped nation stands at very high rates. There are also significant differences between long-term and short-term interest rates and interest rates across various economic sectors. The presence of high interest rates in an underdeveloped economy serves as an obstacle to the growth of both private and public investment. Therefore a low interest rate is essential to encourage private investment in agriculture and industry.

Managing debt: Debt management is one of central bank's main functions in an underdeveloped country. This would strive for appropriate timing and issuance of government bonds, stabilizing their rates and lowering the cost of servicing public debt. This is the central bank that undertakes the selling and acquisition of government bonds, and timely changes to the structure and composition of public debt.

Controlling credit: Central Bank should also aim to control credit with a view to influencing investment and production patterns in a developing economy. The main purpose is to monitor the inflationary pressures that occur during the growth process. This requires the use of credit control methods which are both quantitative and qualitative.

Solving issues with balance of payments: The central bank will also try to avoid and solve the issue of the balance of payments in a developing economy. These economies face serious difficulties in matching payments to achieve development plan goals. Imports and exports create an imbalance which continues to widen with development.