Role of Government

Traditionally, the role of government has been to manage the economy through taxation, economic and monetary policy and ensure a fair society by the state provision of welfare and benefits to those who meet certain criteria, whilst leaving business relatively free to determine to address the challenges and opportunities that arise.
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Governments can use a variety of policies when attempting to reduce the impact of fluctuations in economic activity. Collectively, these measures are known as stabilisation policies and are categorised under the broad headings of fiscal policy and monetary policy.

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Rather than following one or other type of policy, most governments now adopt a pragmatic approach to controlling the level of economic activity through a combination of fiscal and monetary policy.

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In an increasingly integrated world, however, controlling the level of activity in an openeconomy in isolation is difficult as financial markets, rather than individual governments and centralbanks, tend to dictate economic policy.

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Impact of Globalisation

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In an era of increasing globalisation, governments have a much wider role to address than used tobe the case. The global economy is in the midst of a radical transformation, with far-reaching andfundamental changes for the pattern of economic activity.

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These changes pose challenges andopportunities for all economies and the financial services sector has a central role to play inaddressing these challenges, and will be key to increasing the flexibility and dynamism of businessand the wider economy.

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Role of Central Banks

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Central banks operate at the very centre of a nation’s financial system. They are public bodies but, increasingly, they are operating independently of government control or political interference andusually have the following responsibilities:

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• Acting as banker to the banking system by accepting deposits from, and lending to, commercialbanks.

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• Acting as banker to the government.

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• Managing the national debt.

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• Regulating the domestic banking system.

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• Acting as lender of last resort to the banking system in financial crises to prevent the systemiccollapse of the banking system.

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• Setting the official short-term rate of interest.

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• Controlling the money supply.

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• Issuing notes and coins.

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• Holding the nation’s gold and foreign currency reserves.

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• Influencing the value of a nation’s currency through activities such as intervention in the currencymarkets.

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• Providing a depositors’ protection scheme for bank deposits.