Central Bank Functions - Exchange Rate - PDF

Functions of the Central Bank Generally, a central bank is specific to a single country (for example the Bank of England). More exceptionally, it may be common to a group of countries, this is the case of the European Central Bank. The main functions of a central bank are: 1- Defining and conductin...

Functions of the Central Bank Generally, a central bank is specific to a single country (for example the Bank of England). More exceptionally, it may be common to a group of countries, this is the case of the European Central Bank. The main functions of a central bank are: 1- Defining and conducting the monetary policy. 2- Monitoring and managing payment systems. 3- Playing the role of la last resort lender for the banking sector and providing the necessary liquidity to avoid crisis any financial. 4- Setting the interest rate levels. 5- Supervising the banks and ensuring that they respect the regulations and maintain solvency ratios. 6- Guaranteeing price stability ( in minimizing inflation and deflation at around 2%) thanks to the rates directors. 7- Monopolizing the issuance of fiat currency (i.e. putting in circulation coins and banknotes). 8- Participating in the management of external monetary relations in determining the exchange rate regime and the parity of the national currency against foreign currencies. 9- Playing the role of the banker and the financial agent of the government. 1  the main functions of commercial banks 1- Opening and keeping current accounts and saving accounts. 2- Receiving and administering the customers’ deposits. 3- Offering loans and credits in order to make a profit. 4- Management of different types of transactions and transfers locally and internationally. 5- Issuing checks, cards and others. 6- Marketing of several financial products such as bonds, insurance or investment plans. 7- Custody of valuable things and documents. 8- Purchase and sale of currencies. 9- Issuing letters of credit and letters of guarantee. 10- Discounting drafts. 2  The Exchange Rate Definition We call exchange rate the value of one national currency (its price) compared to that of another country. It represents the sum of a foreign currency that we may acquire against one unit of the other currency(or the inverse). How is the exchange rate of a currency fixed ? The exchange rate of a currency is made on a market named the “exchange market " which is called also “Forex”. Like any competitive market, the foreign exchange market is governed by the law of supply and demand. That is to say, in simplifying, more a currency is demanded in the international exchange higher its price (so its value) increases. The exchange rate varies so permanently (every day and even during the day) according to this supply and demand mechanism. In theory, the exchange rate of a currency, can be fixed or floating. 1- A fixed rate: In a fixed rate system, the exchange rate is fixed with respect to a reference currency (which is in usually the US dollar or euro). This rate is fixed (or changed) only by a decision of the concerned national authority issuing this currency. 2- A floating rate: In a floating rate system, the exchange rate varies with each transaction depending on the supply and demand of each of the two currencies in the foreign exchange market. 3 In a floating exchange rate system, a drop in official parity is qualified as devaluation and an increase is qualified as revaluation. The floating rate system was adopted by most countries since 1973. 4