Stock Exchange

University of the People

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Introduction

The MTBI

The central bank holds a pivotal role in maintaining economic stability. The importance

of this financial institution based on a few of its several roles are categorically explained below:

- Defining and implementing the monetary policy: Central banks are responsible

for not only defining but also implementing the monetary policy. They aim to

achieve important macroeconomic objectives; low inflation, full employment and

economic growth that is sustainable. In order to do so they control the money

supply and interest rates.

- Combating inflation: The central bank has a very important role in handling

inflation. Their aim is to combat inflation that affects the purchasing power of the

currency. In order to do so, the central bank uses different tools to keep the

process seamless and in check. One of the tools is adjustment of interest rates, this

maintains the value of money.

- Regulating money in circulation: The central bank holds the authority for

issuance of money in the form of notes and coins, supplying money and

regulating the circulation of money. This is done to make sure that the

economy is liquidated and different agents can use it in their transactions.

Moreover, they are also responsible for stabilizing exchange rates.

- Advisory role: The central bank tends to take up an advisory role for

institutions. For example, one of the very important roles of the central
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bank is to regularly produce studies and reports that hold importance for the

government and/or private organizations (Sanders, 2023).

Central bank independence is referred to as being granted the liberty to independently

make important monetary policy decisions without any influence from the government or any

other external body. This independence holds its importance for many reasons:

- Low inflation rates: It has been recorded that the independence of central banks

leads to a definite drop in inflation in countries around the world. These being the

central bank’s primary focus, no outside pressure can actually help them achieve

their goal, hence leading to economic stability.

- Debt sustainability: As recorded, independence of central banks has and will

lead to better debt sustainability and bring down the risk of fiscal crisis. The

country will be able to properly manage its current and future payment obligations

(Bandaogo, 2021)

Conclusion

In conclusion, central banks play a critical role in maintaining economic stability and

financial system integrity. Central bank independence is essential for ensuring that these

institutions can focus on their core objectives of price stability and financial system health, free

from political interference. A credible and independent central bank is a cornerstone of a robust

and stable economy.

References
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Bandaogo, M. (2021). Why central bank independence matters.

https://documents1.worldbank.org/curated/en/284641638334557462/pdf/Why-Central-Bank-

Independence-Matters.pdf

Santander. (2023). What are central banks and why are they so important?.

https://www.santander.com/en/stories/what-is-a-central-bank#:~:text=Regulating%20money

%20in%20circulation%20%E2%80%93%20they,use%20it%20in%20their%20transactions.

Segal, T. (2022). What is a central bank and does the u.s have one?.

https://www.investopedia.com/terms/c/centralbank.asp