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The Role of Central and Commercial Banks in Determining the Size of a Countrys Money Supply

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It is evidently clear from the discussion that the association between the government banks (centralbanks)and thebankingsector within a country is themaindriver of thatcountry’ s economicstrength. The two playershavedifferentroles in ensuringsufficientcirculation of moneyandavoidtheoccurrence of inflation. Thecentralbankholdsthemoneyandformulatesmonetarypoliciesandframeworks. On theotherhand, thecommercialbankstakepart in the implementation of theframeworkandothermonetarypolicies. One of thefunctions of thecentralbanks is to regulate lending andcirculation of thebroadmonetaryvalue. Thecommercialbanksofferborrowingand lending of themoney to thepublicandotherinvestmentforums. For that reason, the fundamental function of the commercial banks is to holdmoney. According to Krishnamurthy and Vissing-Jorgensen, holdingthemoney by thecommercialbanksserves two functions. Themoney holding segmentsincludethe non-monetary intermediates takingpart in thefinancialaspects, othergovernments with theexception of their centralgovernment, non-financial corporate, andthehouseholds.

Theseagenciesconstitutethecommercialbanks that hold both thenarrowandbroadforms of money. Thebroadform of moneyconstitutesmoneystored as a value, deposits, andotherforms of assets. The holding processserves to regulatethedemandandsupplyregimestherebyensuring an appropriategrowth of the monetaryvalue of thecountry. Through the holding process, thegovernmentcan quantify howvariouseconomicsectorscontribute to thegrowth of money. Thegovernmentcancomprehendwhatfactorsaffectthegrowth of money. Thestrategyhelps in understandingtheview of monetaryexpansion. Second, the holding of money is themostappropriatewayforthe formulation of a normativeframework. Suchframeworks are crucial in theassessment of thepricestabilityandconsistency of moneystocks in theeconomy. Economistandpolicy formulators would usethe data generated from deviation from the norm to makeassessmentsandsubsequentanalysis of thedeviation from equilibrium.

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preview essay on The Role of Central and Commercial Banks in Determining the Size of a Countrys Money Supply
  • Pages: 8 (2000 words)
  • Document Type: Essay
  • Subject: Business
  • Level: Undergraduate
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