Question

Discuss the role of a central bank in a country, particularly in implementing monetary policy. Comment on any regulatory requirements imposed on the central bank in performing their responsibilities.

Comment on the current economic environment (inflation and interest rates) of your selected country, monetary policy employed by the central bank, and effects of those monetary policies on financial markets including asset values and yields.

In the article ‘RBA joins race to the bottom’ (Greber & Shapiro 2016) the Reserve Bank of Australia Governor (RBA) refers to taking a medium - term view to achieve the CPI inflation target, importance of asset prices and that leveraged dynamics matter. Outline and discuss why the RBA Governor thinks leverage matters. Explain the relevance of this statement to central bank practice in your country?

Identify and discuss how Authorised Deposit Institutions (ADIs) deal with credit, liquidity, operating and interest rate risks in the selected country. Comment on how Basel accord ii or iii helps deal with capital and liquidity risks in your selected country.

Answer 1

1. Role of central bank in the country is to manage the stability of the financial system.

Central bank plays an important and efficient role in achieving economic growth through various functions mentioned below.

a. Note issue

b. Banker to the government

c. Bankers' bank

d. Lender of the last resort

e. Controller of credit and maintaining stable exchange rate.

f. Manages and control the foreign exchange of the country.

g. Preventing the balance of payments.

h. Central bank undertakes the selling and buying of government bonds and making timely changes in the structureand composition of public debt.

I. Adjustment between demand and supply of money.

J. Controls the usage of money and credit by monetary policy.

K. Improving credit and currency system.

L. Managing inflation

M. Reduction of unemployment.

Central bank conduct monetary policy through the adjustment of demand and supply of money. It can be done through open market operations. The purpose of open market operations is to steer short tern intrest rates which influences longer term rates and overall economic activity. It directly affect the money supply through buying short term government bonds or selling them. Central bank sets a reserve requirement which informs banks about the quantity of money they habe on reserve each night. Then a central bank sets discount rate thatt how it charges banks to borrow funds. Central bank uses open market operations to buy and sell treasury and other securities from its member banks.It also uses inflation targeting. These are the monetary policy instruments to central banks which include open market operation, bank reserve requirements, intrest rate policy, and capital adequacy.

2. Current economic environment -

Economic environment of a country depends upon tthe economic factors that affects the functioning of business which include:

A. Buying behaviour of consumers.

B. Inflation

C. Employment

D. Income

E. Intrest rates.

F. Productivity and wealth.

It caters to the requirements of various industries such as human resources, agriculture, infrastructure, financial industries, fiscal industries, economic imdustries, economic planning, per capita income and national income.

Various components of economic environment that are interrelated with each other are:

A. Capital market

B. Economic laws.

C. Natural resources

D. Political conditions.

E. Constitutional conditions.

F. Social and culture components.

G. International components

H. Transport and communication components.

Monetary policy sets at managing price stability. In some nations, central banks operate under mandates that refer to objectives such as full employment, , aximum sustainable growth, stable intrest rates. To meet their objectives, central banks deals im financial markets. Monetary policy affects the real economy through the financial markets. Financial markets are the connecting link in the transmission mechanis, between monetary policy and the real economy. The monetary policy instrument is a financial market price which is controlled by the central bank.

Financial market prices reflect market expectations about future economic developmentd such as inflation, output, and likely course of monetary policy.

3. Reserve bank of Australia governor refers to take a medium term view as a flexible medium term inflation target which pay close attention to the labour market and keep a eye on balance sheets in the economy which is the best way of doing. Australian inflation has been outside the target band for about half of the time since the target was declared.

Monetary policy is sets to ensure the monetary policy of the bank is directed to the greatest advantage of the people of Australia that means the stability of the currency of Australia; the maintenance of full employment in Australia and the economic prosperity and welfare of the people of Australia.

The Reserve bank Act 1959 states that monetary policy has both nominal and real objectives. It makes it clear that the inflation targeting framework recognises both nominal and real objectives. The flexibility of the target in terms of specifying that the inflation goal will be avhieved over the cycle adjusted to be in the medium term is the feature tjat recognises the dual mandate. To maintain full employment requires that the economy be on a sustainable path.

4. Authorised Deposit Institutions (ADIs) are the financial institutions regulated by Australian Prudential regulation Authority (APRA) . These includes:

Building societies, credit unions and friendly societies.

Risk associated with ADI are

1. Credit risks

2. Liquidity risk

3. Operating risk

4. Intrest rate risks

An adi with approval to use an internal rqtings based approach to cr3dicredit risk to measure its risk exposures.