CENTRAL BANKS

The Roles of Central Banks in the Economy and Financial System



The Roles of Central Banks in the Economy and Financial System

Introduction

Central banks are the regulatory element in the financial system. Therefore, their activity is related to the strengthening of monetary circulation, wired and sustainable national currency and its exchange rate against foreign currencies; the development and consolidation of the financial system and to ensure effective and smooth implementation of the calculations. Traditionally, the central bank put five main objectives.

The central bank aims to be: the emission center of the country, i.e. enjoy the sole right to issue banknotes, the bank of banks, perform operations with no commercial and business clientele, but mainly with the banks of the country: to keep their cash reserves, the size of which is established by law, to grant them loans (lender of last resort), to supervise, maintain the necessary level of standardization and professionalism in the national credit system, a banker government, for that he must support state economic programs and placing government securities, loans and grant to carry out payment transactions for the government to keep (official), gold-currency reserves, the main computational center of the country to mediate between the country's other banks in the performance of cashless payments, based on the classification of mutual claims and liabilities (clearing), the regulator of the economy by monetary means (Smiley, 2003).

In some countries, these problems are the central banks are fixed by law. Thus, the monopoly on issuing the national currency allows the central bank to control liquidity of credit institutions. The aim of this paper is to discuss the role of central banks especially Federal Reserve and its impact on financial system and economy.

Discussion

The U.S. Federal Reserve and its impact on financial system

Like other central banks, the U.S. Federal Reserve has an impact on the financial system in the three traditional ways:

1.Changes in interest rates

2.Money market instruments and

3.Through foreign exchange transactions

With regard to currency transactions, the most tacit agreements are repurchase (repurchase agreements), providing for the re-sale of the same system previously purchased by customers of currencies for the same price in due time in the future (usually within 15 days) and with a certain interest rate. The volume of transactions on such an agreement corresponds to the amount of temporary injection of reserves into the banking system. Influence the currency market is carried out in order to make the dollar weaker. Repurchase agreement may impose obligations on either the client or on the system (Sullivan and Steven, 2003).

The agreed contract of sale (matched sale-purchase agreements) is opposite repurchase agreements. Comply with the agreed contract for sale, the federal system of selling the currency to its immediate delivery dealer or foreign central banks, agreeing to buy the currency back at the same price in due time in the future (usually within 7 days). This agreement is aimed at the temporary dumping provisions. The volume of transactions on such an agreement corresponds to the amount of temporary relief ...