What changes are to be introduced in the Ruritiania central bank law with a new currency law - Essay Example

Task Changes to be Introduced in the Ruritiania Central Bank Law with a New Currency Law A country can decide to change or amend its currency law. This process involves the Central Bank, which conversely is mandated with various objectives and independence depending with the jurisdiction. This document seeks to identify these factors. It then goes ahead to indicate the changes expected to be introduced in the Rumania Central bank once a new currency law is in place. Central Banks are usually mandated with distinctive objective.

The European Central Bank, for example, under the Monetary Policy Treaty is given the primary objective of maintaining price stability. Policy decisions must be both anticipatory and innovative, considering all relevant information regarding the prospective evolution of prices, and guaranteeing that the final objective is realized in a timely manner (Lamfalussy, 466). Central banks have generally had the objectives of maintaining price stability, maintaining financial stability and fostering financial development more broadly and to support the state’s financing need in times of crisis (Goodhart).

The new Ruritiania Central Bank law should be provided with these operations under the new law. Like most jurisdictions, the Monetary Policy Treaty in Europe issues the European System of Central Banks full independence to determine the appropriate level of interest rates (Lamfalussy). The years 1930 to 1960 saw government control over central banks (Goodhart). This initiated substantial economic depressions, and was deemed pragmatic. It was this negative impact that led to the independence of central banks all over the globe.

The new Ruritiania currency law should provide for the independence of the Central bank if it is to be adopted to avoid encounters such as economic depressions (Giovanoli).The new Ruritiania law provides for the net foreign exchange reserves. Under Article 5(1) of the law, it is clearly stipulated that the mandate of the central bank shall be to ensure the aggregate amount of its monetary liabilities shall not exceed the equivalent of its foreign exchange reserves. Such aggregate amount of the monetary liabilities as provided under sub-article 2 shall be the sum of all existing banknotes, coins and main units existing in any branch of the central bank, and also any credit balances of all accounts maintained on the books of the central bank and its organizational units.

Article 7 provides for dollarization, a factor that occurs when a country formally discards its own currency and adopts a more unwavering currency of another country as a legal tender with the aim of avoiding macroeconomic risks such as price instability and prolonged depressions, especially in the developing world. In most instances, countries normally tend to turn to the US Dollar (Berg, 289). The central bank is mandated to convert the currency of Ruritania into US Dollars without restriction within the Republic of Ruritania.

Adopting a foreign currency as a legal tender usually entails costs and benefits, and it is upon the central bank to weigh between them (Jacome & Lonnberg, 307). Therefore, the Ruritiania new currency law should include measures that tend to weigh properly the pros and cons of dollarization before adopting it.Articles 5(6(f)) and (7) provides for the guaranteed convertibility of the currency of Ruritania by its central bank. This includes provisions on payment by residents of countries other than the residents of Ruritania in freely convertible foreign currency.

The new law should ensure control conversion of foreign currency freely. It should include regulative measures.The Ruritiania Central Bank law should consequently be amended before it is adopted to prevent the nation from factors such as dollarization and control by the government of the central bank that might lead to economic depressions.Works CitedBerg, Andrew and Borensztein, Eduardo. Full Dollarization; the pros and cons. Switzerland: International Monetary Fund, 2000. P 289.Giovanoli, Mario, and Devos, Diego.

International Monetary and Financial Law: The Global Crisis. New York: Oxford University Press Inc, 2010. 22.56-22.72.Goodhart, E. Bank of international settlements; the changing role of central banks. Switzerland: BIS Press, 2010. P 197.Lamfalussy, Alexander. Convergence and the role of the European Central Bank. Tokyo: ECB Press, April 22, 1997. Web. October 2, 2011. P 466. Jacome, Luis, and Lonnberg, Ake. Implementing official dollarization. Switzerland: International Monetary Fund Press, 2010. P 307.