Description
This is a PPT about The Central Bank - Functions and Roles; What should the centrl bank do and how; How does RBI perform; RBI track record
The CB and Base Money
? We believe that the CB has reasonable control over base
money and thereby on the money supply process ? At times the CB is forced to make changes in the reserve money ? Capital flows
?
Central Bank intervention ? Automatic monetization of deficit ?
? Fiscal deficit – government borrowings
?
? Structure of intermediation in the financial markets also
impacts the degree of control that the CB can exercise over the quantum of base money
Disintermediation
? Market, institutions and Intermediation
? Savers – Deposits – Credit – Firm (Bank)
? Savers – Equity Market IPO – Investors
? Savers – Venture Capital – Firm ? Supplier – Credit – Buyer ? Internet portal – www.debtonnet.com
? More the transactions without an intermediary
institution, less is the role of the central bank in regulating quantity of M ? Higher the disintermediation lower is the degree of control of CB over the money supply process
The Central Bank - Functions and Roles Indian Case
? ? ? ? ? ? ? ? ? ? ? ? ?
Core functions Monetary policy formulation and execution Currency issue and its value management The Lender of the Last Resort Banker to the Government Custodian of financial stability Banking regulation and supervision Facilitate financial inclusion Others Fostering growth of financial markets and institutions Payment systems and technologies Regulation and supervision of financial system ? Manager of Government Debt ?
What should the central bank do? Seven Principles
? Price stability provides substantial benefits ? Alignment of Fiscal and Monetary policies ? Avoid Time Inconsistency
? Short term benefits vis-à-vis long term costs
? Policies need to be forward looking
? Lags and delays in - monetary transmission ? Internal (within the system) ? External (contracts, information processing, decision making & implementation etc)
? Accountability is desirable ? Fluctuations in output are also important ? Serious economic downturns - financial instability
How they should do it? Seven Rules
? Price stability should be the overriding goal of
?
? ? ? ? ?
monetary policy An explicit nominal anchor should be adopted ? Inflation ? M3 growth Goal dependent Instrument independent Mechanisms should be created to ensure accountability Transparent and communicative Financial stability should be a specific goal
Seven Principles – How does RBI perform?
? Price stability - Followed in monetary policy ? Alignment of Fiscal and Monetary policies
? Framework exists (FRBM) but can be blown to
? ? ? ? ?
winds as was done in 2009-10 budget ? RBI exit from Primary Issues of Government Debt ? Fiscal deficit is not automatically monetized Avoid Time Inconsistency – not always evident Policies need to be forward looking – no clarity Accountability is desirable - Measures missing Fluctuations in output are also important ? Followed in monetary policy Serious economic downturns - financial instability ? Excellent track record
Seven Rules – RBI track record
? Price stability should be the overriding goal
? It is not always
? An explicit nominal anchor should be adopted
? No explicit anchor, Multiple indicator approach
? Goal dependent – Yes. Process not known ? Instrument independent – Yes. Finance Minister ? ? Mechanisms should be created to ensure
accountability – None exist at present ? Transparent and communicative ? Significant progress made yet internal deliberations not disclosed to public ? Global best: New Zealand 12, RBI – 2 (DincerEichengreen Index of 15 parameters) ? Financial stability should be a specific goal ? Yes, it is a stated goals
doc_800164210.ppt
This is a PPT about The Central Bank - Functions and Roles; What should the centrl bank do and how; How does RBI perform; RBI track record
The CB and Base Money
? We believe that the CB has reasonable control over base
money and thereby on the money supply process ? At times the CB is forced to make changes in the reserve money ? Capital flows
?
Central Bank intervention ? Automatic monetization of deficit ?
? Fiscal deficit – government borrowings
?
? Structure of intermediation in the financial markets also
impacts the degree of control that the CB can exercise over the quantum of base money
Disintermediation
? Market, institutions and Intermediation
? Savers – Deposits – Credit – Firm (Bank)
? Savers – Equity Market IPO – Investors
? Savers – Venture Capital – Firm ? Supplier – Credit – Buyer ? Internet portal – www.debtonnet.com
? More the transactions without an intermediary
institution, less is the role of the central bank in regulating quantity of M ? Higher the disintermediation lower is the degree of control of CB over the money supply process
The Central Bank - Functions and Roles Indian Case
? ? ? ? ? ? ? ? ? ? ? ? ?
Core functions Monetary policy formulation and execution Currency issue and its value management The Lender of the Last Resort Banker to the Government Custodian of financial stability Banking regulation and supervision Facilitate financial inclusion Others Fostering growth of financial markets and institutions Payment systems and technologies Regulation and supervision of financial system ? Manager of Government Debt ?
What should the central bank do? Seven Principles
? Price stability provides substantial benefits ? Alignment of Fiscal and Monetary policies ? Avoid Time Inconsistency
? Short term benefits vis-à-vis long term costs
? Policies need to be forward looking
? Lags and delays in - monetary transmission ? Internal (within the system) ? External (contracts, information processing, decision making & implementation etc)
? Accountability is desirable ? Fluctuations in output are also important ? Serious economic downturns - financial instability
How they should do it? Seven Rules
? Price stability should be the overriding goal of
?
? ? ? ? ?
monetary policy An explicit nominal anchor should be adopted ? Inflation ? M3 growth Goal dependent Instrument independent Mechanisms should be created to ensure accountability Transparent and communicative Financial stability should be a specific goal
Seven Principles – How does RBI perform?
? Price stability - Followed in monetary policy ? Alignment of Fiscal and Monetary policies
? Framework exists (FRBM) but can be blown to
? ? ? ? ?
winds as was done in 2009-10 budget ? RBI exit from Primary Issues of Government Debt ? Fiscal deficit is not automatically monetized Avoid Time Inconsistency – not always evident Policies need to be forward looking – no clarity Accountability is desirable - Measures missing Fluctuations in output are also important ? Followed in monetary policy Serious economic downturns - financial instability ? Excellent track record
Seven Rules – RBI track record
? Price stability should be the overriding goal
? It is not always
? An explicit nominal anchor should be adopted
? No explicit anchor, Multiple indicator approach
? Goal dependent – Yes. Process not known ? Instrument independent – Yes. Finance Minister ? ? Mechanisms should be created to ensure
accountability – None exist at present ? Transparent and communicative ? Significant progress made yet internal deliberations not disclosed to public ? Global best: New Zealand 12, RBI – 2 (DincerEichengreen Index of 15 parameters) ? Financial stability should be a specific goal ? Yes, it is a stated goals
doc_800164210.ppt