Brief on International Finance, Essay Example

One of the vital roles of the Central Bank is to regulate the money policy. This is done by either expanding or contracting  money supply. According to Burroughs (2006),  central banks buy their own currency or another country’s currency  to influence the supply of money. For instance, all receipts from foreign exchange can be exchanged for the local currency at the market rate or at a rate set by the bank. The supply of money increases when the central bank buys foreign currency after selling the local currency.

To stabilize the financial systems in 2007–2009, many countries announced major programs for this purpose. Some of these programs included easing monetary policy with very low interest rates, frequent establishment of facilities to aid in stablizing credit markets  and recognizing the importance of coordinating issue of debts to avoid unstable financial markets.

In an effort to stabilize the financial system the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009. The U.S had about $ 1 trillion while the above banks purchased government debt with $2.5 trillion. US and European banks also purchased preferred stock that had been newly issued in major banks which raised the banking systems’ capital by $1.5 trillion.  Hilsenrath, J.,  Perry, J., Reddy, S., & Solomon, D. (2008) were of the opinion that the coordination between countries contributed to the reduction of interest rates.

Different countries used a different criteria to determine the limits of the monetary injections into the economy. For instance, Federal Reserve used interest rates to deal with financial crisis. United States on the other hand, is said to have been more agreesive. The central banks made the right moves because they used monetary polices that considered the liquidity the world required.

References

Burroughs, T. (2006). World Currency Exchange Rates & the Foreign Exchange Market. MATH 7780. Villanova University

Hilsenrath, J.,  Perry, J., Reddy, S., & Solomon, D. (October 9, 2008).Central Banks Launch Coordinated Attack . Wall Street Journal. Retrieved on May 22, 2011 from http://online.wsj.com/article/SB122346445779914857.html