The Predominant Mandate Of Central Banks Essay

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The predominant mandate of central banks is to deal with inflation and keep the financial system stable under any circumstances (Ortiz, 2009), and the central banks handling the monetary policy through popular instruments are the only body who are responsible for doing so. Handa (2009) lists six most important instruments that central banks have used to run the money policy. These tools have been historically developed along with the vicissitudes of the central banks during the growth of the international financial system.

3.1.3.1. Open-market operations
The main activity of this tool is that the central banks purchase and sell marketable securities in the financial markets such as government bonds. The aim of this policy is to affect the monetary base and as a result, it will influence to the money supply of the economy in the short period.
3.1.3.2. Reserve requirements
The conduct of this approach is that the central banks set a fixed reserve ratio, which is measured by the proportion of customers’ deposits and approved liquid assets, to domestic commercial banks or credit institutions. This rate is often higher than as usual. The purpose of this method is to limit the amount of money that credit institutions can use to make loans to their customers.
In order to protect a particular commercial bank or credit institution out of bankruptcy and the whole banking system out of systematic collapse due to excessive lending or mismanagement, many central banks around the
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