Role of a Central Bank in a Modern Economy

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THE ROLE OF A CENTRAL BANK IN A MODERN ECONOMY

This research examines the role of central banking in a modern economy. Differing perspectives on the role of central banks are examined.

In a modern market society, central banking provides a variety of functions. These functions range from the provision of transaction services to monitoring and intervening to maintain the integrity of banks and the banking system to efforts to stabilize the value of the currency and assuring the convertibility of bank issues to the implementation of policies designed to manipulate monetary aggregates in the pursuit of macroeconomic goals.

A major contemporary argument in relation to the role of central banking in modern economies concerns whether such a role is valid or whether the role should fall to the markets. Kevin Dowd argues generally that central banking should be abolished in favor of a free banking system sans all governmental controls. Dowd, essentially, rejects any kind of role for central banks. Charles Goodhart, in contrast to Dowd, argues that many of the functions performed by central banks could be performed as well or better by other intermediaries, but that central banking continues to be required to maintain the integrity of banks and the banking system. Both Dowd and Goodhart agree that transactions services could provided by other intermediaries as well (Goodhart) or better

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Category: Economics - R

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