Finance and Accounting of the Central Bank of the UAE - Research Paper Example

During the financial crisis in the banking sector, the central bank plays a more active role in controlling the interest rates and acting as a lender of last resort, other than its prime role of providing the nation’s supply of money. Reckless and fraudulent behaviors of other financial institutions and banks are prevented as the central banks have supervisory powers (Padoa-Schioppa, 2002). The goals of central banks are generally specified as price stability, stable real growth, financial stability, interest rate, and exchange rate stability. 1. Discuss briefly the five objectives of central banks. The following are the main five objectives of a central bank: Price Stability The objective of a central bank is to ensure the stability of the prices of the goods and services in a country.

Inflation will occur in case the central bank injects money into the economy by using different means and consequently if the money from the market is taken back by the bank it will result in deflation. The central bank insures price stability by eliminating inflation and deflation factors so the average price should neither fall nor rise on an average (Padoa-Schioppa, 2002). Stable Real Growth The importance of this objective of a central bank can be understood in a way that the whole economy is dependent on stable real growth.

The central bank has to ensure that the real growth should remain stable and is further influenced by price stability. . The interest rate and the supply of money are the tools that are mainly used to regulate the financial structure (Dennis & Richard, 1981). Interest Rate Stability Central bank controls the interest rate as when the central bank reduces the reserve amount then the commercial banks get more money to offer for loans which makes the interest rates lower down and when the central bank increases the reserve amounts then the commercial banks have less money to offer for a loan which makes the interest rates to jump high.

So certain policies are made to make the interest rate stable for a financially strong economy (Dennis & Richard, 1981). Exchange Rate Stability Stabilizing the exchange rate is another critical role that is played by the central bank. All the above factors and many other factors including import, export, demand, supply, etc. play their part in determining the exchange rate. Also, all these factors are dependent on the policies and actions of a central bank. So to stabilize the exchange rate of a country, the central bank should have to stabilize these factors first (Dennis & Richard, 1981). 1.1.

In their pursuit of maintaining price stability, central banks are said to manage the money supply process. There is numerous method or ways used by the central banks to increase or decrease the amount of money in the country and the banking system. The steps taken by the central bank for this sort of action are generally known as monetary policy. There are three ways a central bank can inject or withdraw money from the country to maintain price stability (Christopher, 1984). The money supply can be modified by changing the reserve requirements of commercial banks.