Monetary authorities

The term monetary authorities indicates, within the Institution S of a country, the organizations in load of the Monetary policy, i.e. of the policy of Foreign exchange rate and the fixing of the Interest rate.

It is generally about the Central bank, but the term can sometimes include the Ministry for finances, when the central bank is not independent.

Role of the monetary authorities

The monetary authorities have like first vocation “to guarantee” (with the illustrated direction) the value of the currency, in other words, the “confidence” carried by the carriers and holders (potential) of currency towards the aforementioned currency. Term “to guarantee” revêt also direction clean, that it is in the system of the Gold Standard (the gold reserves held by a Central Bank were the “proof” that monetary confidence was founded) or, in the modern system, by a central bank praetor in last spring.

The second vocation of a monetary authority is to create (even to destroy) currency (coins and tickets for example, but actually, a simple dummy entry can make it possible to create currency). However, the creation of new currency can have an direct impact on the Inflation. A rise in inflation is generally regarded as harmful (see Conséquences of inflation).

The third vocation of a financial authority is to direct “the economy” according to priorities which are fixed to him by the political power, or by their deed of partnership, for the independent central banks (the most frequent case in the countries with market economy; it is the case of the ECB, of EDF, the BoJ). Among the political priorities (by extensions, priorities of an autonomous Central Bank), one can normally quote:

will to guarantee a relative monetary stability and, in particular, to avoid phenomena of too strong Inflation, or, contrary, of Deflation, these two cases which can generate brutal corrections and serious crises. Concretely, that results in the determination of interest rates which remain always “reasonable” (let us say between 2% and 5%)

will to support the growth via the fall of interest rates, which makes it possible to increase the liquidities of the market. This supports the investments normally on the one hand as well as an upsurge in wages on the other hand (by redistribution of the liquidities which are more easily available), and thus, under certain conditions, the revival of the economic growth. A contrario , the surge of liquidities also supports inflation, this being able to affect the purchasing power. Important and prolonged, the surge of liquidity makes lose its value with the currency.

will to exploit engagements (debts) of States, by supporting inflation (to devaluate the currency: to see inflation - economic inflation and choices)

to influence the Trade balance. The stronger one currency is, the less it costs much to buy a foreign resource. But, reciprocally, the currency being strong, it becomes more difficult to export its own productions. The reciprocal one is true for a soft currency (favorisation of exports, more expensive imports).

See too

financial Authorities

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