Friday, May 12, 2006

Central Banks roles in Developing Countries

Excellent, another weekend, another stack of journals to read! Yesterday I spent my whole day trying to understand the functions of the central bank and why is it important for developing countries. First of all, why would a regular person even be interested in the central bank? Well, mainly because they can have the power to control whether the price of your toothpaste, tomato or baking powder goes up or whether they become part of a government’s employment strategy. For developing countries, it is necessary to establish a competent central bank under difficult circumstances of financial system sophistication and resources. The main discussion on central banks are whether they should or should not be independent from the actual government. Some say they should be part of government since they are the elected body who should make decisions according to the citizen's needs. Others say that independence is necessary to create credibility with international financial markets on unbias, economically sound decisions. I think that there should be a combination of both the central bank working together with government to understand the reasons behind their decisions on increases/decreases of money supply but that contracts are built with both parties in accordance to the objectives of the society.

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