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Central Banking Government

The Role of Central Bank in Financial Development of Libya

The best known early prototype of a central banking system was the medieval European Knights Templar where promises to pay were widely circulated and accepted as value. In 1668, Riksbank of Sweden was established as the first central bank followed by the Bank of England which was established in 1694. On December 23, 1913, the U.S. Congress passed the Glass-Owen Bill and created the US Federal Reserve.

In some countries, central banks emerged from commercial banks or government banks that exercised monopoly issuing notes. In other countries such as the former Soviet Union, entirely new central banks have been established. Member countries of the European Union, on the other hand, created a supranational central bank that oversees a monetary union.

Role of Central Bank

Central banks implement a country's monetary policy. Its function include control and maintenance of the stability of the national currency and the entire money supply, manage foreign exchange and gold reserves, regulate and supervise the banking industry, influence market interest rate, manage inflation and exchange rate.

The central bank is called the government's banker and the bankers' bank. Most central banks have limited ability to influence the interest rates charged by private individuals and companies. To move toward a target interest rate, the central bank generally lend money or borrow money from a limited number of qualified banks or purchase and sell bonds until the targeted market rate is achieved. The central bank controls certain types of short-term interest rates to influence the stock- and bond markets as well as mortgage and other interest rates.

Effectivity of Tools Used by the Central Bank

The monetary policy instruments used by central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount, and credit policy.A central bank influences the money supply in an economy directly through open market operations. The money supply is increased when the central bank buys securities and reduced when securities are sold. The central bank also hold foreign exchange reserves (usually in the form of government bonds) and official gold reserves to influence over any official or mandated exchange rates.

Central banks establish reserve requirements for other banks to limit money supply. The central bank also require all banks to hold a certain percentage of their assets as capital.Central banks may require that some or all foreign exchange receipts (generally from exports) be exchanged for the local currency. Money supply is increased when the central bank purchases the foreign currency.

Importance of Financial Development to Economic Development

Policies that enhance financial sector performance result in higher economic growth. A well-developed financial system enhances the efficiency of intermediation by reducing information, transaction, and monitoring costs. Financial development promotes investment by identifying and funding good business opportunities; mobilize savings; monitors the performance of managers; enables the trading. hedging, and diversification of risk; and facilitates the exchange of goods and services. Thus, a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress will lead to economic growth.

Adoption of appropriate macroeconomic policies, encouragement of competition within the financial sector, and development of a strong and transparent institutional and legal framework for financial sector activities are crucial for financial development.

Financial sector development can be hindered by government-imposed restrictions and price distortions on the financial sector, particularly the use of the financial system as a source of public finance. High inflation taxation, high required reserves ratios, subsidized or directed credit, collusive contracts between public enterprises and banks, credit rationing, and ceilings on deposit and loan interest rates are instruments for financial repression that undermine economic growth.

Monetary Theories

  1. Keynesianism

Keynesian theory explains the determinants of savings, consumption, investment and production. It seeks to provide solutions to failures of laissez-faire economic liberalism which advocates that markets and the private sector operate best without state intervention. Keynes believed that the state should come in to help maintain economic growth and stability in a mixed economy, both the public and private sectors can have important roles, and that government policies could be used to increase aggregate demand which in turn will increase economic activity and reduce high unemployment and deflation. The interaction of aggregate demand and aggregate supply determines the level of output and employment in the economy.

Keynes argued that the state can adopt either reduced interest rates or invest in infrastructure to stimulate the economy and induce investments. Government spending in infrastructure will stimulate more production and investment.

Keynes believed that excessive saving, i.e. saving beyond planned investment encouraged recession or even depression. Excessive saving will lead to less investment partly due to reduced consumer demand or pessimistic business expectations.

Keynes gave the following arguments against laissez-faire. First, income and substitution effects of falling rates go in conflicting directions such that saving does not fall as much as interest rates fall. Second, spending does not rise much as interest rates fall since planned fixed investment in plant and equipment is mostly based on long-term expectations of future profitability. Third, Keynes argued that the demand for the stock of money determine interest rates in the short run and that savings and investment are not the main determinants of interest rates. Lastly, Keynes pointed to a liquidity trap under which interest rates cannot fall. In this liquidity trap, bond-holders fearing rises in interest rates and capital losses on their bonds that they try to sell their bonds to acquire money and achieve liquidity. Economists now realize that nominal interest rates cannot fall below zero.

Keynes recommended countercyclical fiscal policies, deficit spending during recession and when unemployment is persistently high, and the suppression of inflation in boom times through increased taxes or reduced government infrastructure spending. He further advocated that the government's monetary policy should be directed at influencing the rate of interest to achieve levels of investment sufficient to maintain full employment. Keynes believed that governments undertake measures to solve problems in the short run rather than waiting for market forces to move in the long-run.

2. Neo- Keynesianism

Neo-Keynesian theory rests on microeconomic models that indicate that nominal wages and prices are "sticky" or do not change easily or quickly with changes in supply and demand and that quantity adjustment should be done. Neo-Keynesians argue that demand for money is intrinsic to supply.

John Hicks produced the IS-LM model which policy-makers could use to attempt to understand and control economic activity. The IS-LM model is nearly as influential as Keynes' original analysis in determining actual policy and economics education. It relates aggregate demand and employment to three exogenous quantities namely the amount of money in circulation, the government budget, and the state of business expectations. The IS-LM model is used to predict the impact of increase in money supply on output and employment.

The second Keynesian policy-maker's theoretical apparatus was the Phillips curve which indicated that increased employment and decreased unemployment implied increased inflation. Keynes predicted that falling unemployment would cause a higher price but not a higher inflation rate. The Phillips curve is used to predict the impact of an increase in money supply on inflation.

3. Monetarism

Monetarism is a school of economic thought that focuses on the supply of money in an economy as the primary means by which the rate of inflation is determined. Monetarism focuses on the macroeconomic effects of the supply of money and central banking. Monetarism today is mainly associated with the work of Milton Friedman. Friedman argued that excessive expansion of the money supply is inherently inflationary and that monetary authorities should focus solely on maintaining price stability. Friedman believed that inflation is always a monetary phenomenon and advocated a central bank policy aimed at keeping the supply and demand for money at equilibrium between growth in productivity and demand.

In Friedman's restatement of the quantity theory of money in 1956, he challenged the Keynesian assertion that "money does not matter" and argued that the supply of money does affect the amount of spending in an economy. He believed that when money supply is expanded, the excess money balances will be spent leading to increase in aggregate demand. Conversely when money supply is reduced, people would want to replenish their holdings of money by reducing their spending.

Monetarists resurrect the pre-Keynesian view that market economies are inherently stable in the absence of major unexpected fluctuations in the money supply. They asserted that active demand management through increasing government spending is unnecessary and harmful. They believe that incorrect central bank policy is at the root of large swings in inflation and price instability and that the primary motivation for excessive easing of central bank policy is to finance fiscal deficits by the central government. They view that restraint of government spending is important to restrain excessive monetary growth.

When demand-driven fiscal policies failed to restrain inflation and produce growth in the 1970s, the central bank was given the cardinal responsibility to fight inflation. The International Monetary Fund recommends austerity shock treatment. President Margaret Thatcher of the United Kingdom implemented slash in government spending in the late 70s and early 80s. President Reagan increased real government spending. Unemployment in both countries remained stubbornly high as their central banks raised interest rates to restrain credit. Inflation rates in both countries were brought down allowing the liberalization of credit and the reduction in interest rates which in turn resulted to inflationary economic booms in the 1980s.

The Central Bank of Libya

The Central Bank of Libya (CBL) started operations on April 1, 1956 to replace the Libyan Currency committeewhich was established in 1951 and whosefunctions were confined to maintaining sterling assets against the issue of local currency. The CBL was established to control money supply, credit and supervise banks.

The functions of the CBL include a) issuing and regulating banknotes and coins and be the sole issuer of Libyan currency; b) maintain and stabilize the Libyan currency internally andexternally; and c)maintain and manage the official reserves of gold and foreign exchange.

The CBL is responsible for selecting suitable investments and amounts to be invested in each currency,taking into consideration developments in foreign exchange and money and capital markets to ensure safety and profitability. The CBL allows commercial banks to keep foreign assets in accordance with regulations. The CBL dismantled foreign exchange controls to encourage foreign investors.

The CBL functions as a fiscal agent for the stateIt keeps accounts of revenues and expenditures, disburses transfers and collects funds domestically and abroad, administers letters of credit transactions on behalf of its clients. The CBL manages public debt consisting of treasury bills and treasury bonds. It manages the state's subscriptions to regional andinternational institutions and manages/execute payments on agreements concluded between Libya and other countries.

The role of the CBL in economic development is significant in mobilizing and channeling savings for development projects. It contributes to strengthening Libya's financial position through managing the public debt with its holdings of gold and foreign exchange. Its indirect role in the economic development of Libya is enforced by controlling the volume, direction and cost of credit of commercial banks, strengthening and stabilizing the Libyan currency and economy which in turn encourages savings by citizens and promote incentives for the utilization of these savings in productive and safe investment.

The CBL examines and analyses the financial positions of commercial banks and ensures that they keep cash reserve, legal liquidity within the main stipulated ratios. Directives are issued to commercial banks regarding the volume and direction of credit extended by the banking sector.


中央银行系统中最有名的早期原型,是中世纪欧洲的圣殿骑士,承诺支付被广为流传,并接受价值。在1668年,瑞典成立瑞典央行的央行中第一家由英格兰银行成立于1694 。 1913年12月23日,美国国会通过“​​格拉斯 - 欧文创建比尔和美国联邦储备委员会。
约翰·希克斯的IS-LM模型,政策制定者可以用它来试图了解和控制经济活动。 IS-LM模型是凯恩斯原来确定实际的政策分析和经济学教育的影响力。它涉及的总需求和就业三个外生数量,即流通中的货币量​​,政府预算,业务预期的状态。 IS-LM模型,用于预测货币供应量的增加对产出和就业的影响。
货币主义的经济思想是一所学校,专注于在一个经济体的货币供应量为主要手段的通胀率确定。货币主义的货币供应和中央银行侧重于对宏观经济的影响。米尔顿·弗里德曼(Milton Friedman)的工作主要是与货币主义今天。弗里德曼认为,货币供应量的过度扩张本质上是通货膨胀和货币当局应该只专注于维持物价稳定。弗里德曼认为,通货膨胀是一种货币现象,并主张央行政策旨在保持生产率和需求增长之间的平衡供给和需求的钱。
利比亚中央银行( CBL ) , 1956年4月1日开始运作,来取代利比亚的货币committeewhich成立于1951年和whosefunctions只限于维持英镑资产兑当地货币的问题。 CBL的成立是为了控制货币供应,信贷和银行监督。
CBL的功能包括:a)纸币和硬币的发行和调节,是利比亚的唯一发行货币;二)维护和内部稳定利比亚货币andexternally ;和c)维护和管理的官方储备黄金和外汇。
CBL是负责选择合适的投资项目和金额投资于各货币,考虑考虑外汇及货币和资本市场的发展,以确保安全和盈利能力。 CBL允许商业银行按照规定保持外汇资产。 CBL拆除的外汇管制,以鼓励外国投资者。
CBL功能作为财政的stateIt代理记账的收入和支出,动支传输和国内外募集资金,代表其客户管理信用交易的字母。 CBL管理公共债务,包括国库券和国债。管理国家的地区和国际机构的订阅和管理/执行利比亚和其他国家之间缔结的协议付款。