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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art defends a continuing need for the existence of central banking, his conception of what central banking should be is quite different from what contemporary central banking actually is. The role of central banking, according to Goodhart, could and should be curtailed to a significant extent. Dowd by contrast, rejects any need for a central banking system in any role. He favors a completely laissez-faire banking. All In Favor, Say Aye The pronouncements of both Dowd and Goodhart with respect to a role for central banking place them among the ranks of "born yesterday" economists. These economists are able to doodle with abstract concepts in a financially secure environment where they are able to develop theories that need not be tested in the real world. They quite apparently have never experienced a financial panic, or a bank run, or a general loss of public confidence in a country's banking system. As is true of so many contemporary economists who propose an end to any type of governmental intrusion into economic activity, they apparently fail to realize that such intrusions typically develop in the face of market failures. Dowd even attributes the contemporary role of central banking to Keynesian eco
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Approximate Word count = 2453
Approximate Pages = 10 (250 words per page)

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