BMG306/03: A central bank, reserve bank, or monetary authority, is an entity responsible for the monetary policy of its country: Introduction to International Business Assignment, WOU, Malaysia


Wawasan Open University (WOU)

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BMG306/03: Introduction to International Business

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A central bank, reserve bank, or monetary authority, is an entity responsible for the monetary policy of its country or of its group of member states. In most countries, the central bank is state-owned and has a minimal degree of autonomy to allow for the possibility of government intervention in monetary policy. An “independent central bank” is one that operates under rules designed to prevent political interference.

Examples of independent central banks include the U.S. Federal Reserve, the Bank of England, the Reserve Bank of India, the Bank of Japan, the Deutsche Bundesbank, the Bank of Canada, the Reserve Bank of Australia, and the European Central Bank. The primary responsibility of the central bank is to maintain the stability of the national currency and money supply, though more active duties include controlling subsidized loan interest rates, and acting as the lender of last resort to the private banking sector during times of financial crisis.

A central bank may also have supervisory powers to ensure that private banks and other financial institutions do not behave recklessly or fraudulently. Thus, the central bank’s function is to maintain economic stability by storing and regulating the flow of money in its country, or larger area of responsibility, much as various organs in the human body regulate the production and flow of blood, including the production and flow of red and white blood cells, to support the health of the body as a whole.

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Historically, the body of human society has suffered ill health, as has its economic system, including the collapse of several banking systems. As humankind develops greater maturity and a peaceful world of harmony and co-prosperity is established, the economic system, including the banking system, will enjoy greater health and the central bank will be able to develop effective policies and implement them successfully.

Central banks often serve as a nation’s principal monetary authority and maintain a list of fiscal responsibilities. These institutions regulate their nation’s money supply and credit and are responsible for issuing currency, managing the foreign exchange rate, and administering monetary policies to regulate economic conditions.

Central banks also manage their government’s stock register and gold reserves, and hold deposits representing the reserves of other banks. These institutions also conduct business appropriate to the protection of public interest.

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A central bank acts as the fiscal agent of its government and is responsible for the supervision of commercial banks. Central banks fulfill the duties of primary bankers for their government and private banking branches and often operate as a monopoly in the issuance of banknotes. In its use of monetary policy, a  central bank can change its nation’s money supply by adjusting the interest rate. In turn, the interest rate is used to manage inflation and the national exchange rate. A central bank can also influence commercial bank borrowing by setting the interest rate at an encouraging or discouraging level. In this way, a central bank maintains direct control over its nation’s economy.

In addition to fulfilling its range of responsibilities, a central bank will aim to maintain high levels of employment, efficient productivity, and stable market prices. Above all, central banks seek to monitor and foster their nation’s economic growth.

Despite their authority, central banks have limited powers to put their policies into effect. Even the U.S. Federal Reserve must engage in buying and selling to avoid financial crises and meet its targets.

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