Question

Explain the role of Bank Rate in stabilizing an economy. How is it relevant to developing countries.

Answer 1

The bank rate is the rate of interest that is charged by the central bank while lending the loan and advance to the commercial banks.

Bank rate is used by the central bank to regulate the money supply in the economy as excess money supply in the economy can cause the instability in the economic systems. high rate of the rise in the money supply would increase the inflation rate. higher inflation rate will destabilise economic systems and the investors are no longer interested in making investment in the economy. country such as a Venezuela has faced the problem of high inflation and investors reduced their investment in the such countries.

But the monetary policy through the bank rate is not always successful. The problem of liquidity trap and the unwillingness of commercial bank to lend out the money make the monetary policy ineffective in Dealing with the economic fluctuations or economic cycle.