The central bank is a financial institution that has privileged control over the distribution and production of money for a group of nations or nations. The central bank contains a monetary policy that helps in drafting announcing and implementing the plan of actions that control the circulation of money in a country. In this way, it helps to influence employment, output, and prices. The bank uses the following ways to control money circulation.
Use of Open Market
The central bank has adjusted the money supply by the use of open market operations. For instance, the bank sells money to the government through “sale and repurchase” agreement and therefore taking in money from commercial banks. Through the use of an open market, it has helped steer short term interest rates which in turn will impact long term interest rates ( Bech, M., & Keister, T., 2017)
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Reduction Of Interest Rates
The bank has managed to curb the global financial crisis through the reduction of interest rates. It doesn't set interest rates for certain loans but instead uses certain strategies to push interest rates towards desired levels. The bank has undertaken unconventional monetary policies due to the increase of deflation. For instance, the bank bought long term bonds in the United Kingdom, United States among others aiming at lowering long term rates and loosening monetary conditions ( Dell'Ariccia, G., Rabanal, P., & Sandri, D,2018)
Use Of Quantitative Easing Program
Through this platform, the bank can generate currency and use it to purchase securities and properties such as government bond. When assets are purchased, money enters the bank system and therefore generates, which enables the bank to lead out more loans. In turn, this helps to decrease long term interest and boost more investment.
Reserve Requirement
The use of Reserve Requirement has helped to control money circulation in the economy. It mandates depository organizations to retain a certain amount of cash in reserve against the amount of net transitions accounts. In this way, if it increases the reserve requirement more money circulates into the economy and vice versa ( Bech, M. L., & Malkhozov, A., 2016)
The central bank has ensured that the country's economy remains live through controlling the circulation of money in the economy. Implementation of monetary policy has helped in the management of micro and macroeconomic trends, therefore ensuring that there is financial and economic stability.
References
Bech, M. L., & Malkhozov, A. (2016). How have central banks implemented negative policy rates?. BIS Quarterly Review of March .
Bech, M., & Keister, T. (2017). Liquidity Regulation and the implementation of monetary policy. Journal of Monetary Economics , 92 , 64-77.
Dell'Ariccia, G., Rabanal, P., & Sandri, D. (2018). Unconventional monetary policies in the euro area, Japan, and the United Kingdom. Journal of Economic Perspectives , 32 (4), 147-72. Retrieved from https://www.investopedia.com.Monetary Policy Definition - Investopedia
