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How central bank of PNG sets use reserve requirements to control inflation on the circulation of currency in the economy and some examples of open market operations and the citation and full references

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The Central Bank of Papua New Guinea (PNG), known as the Bank of Papua New Guinea (BPNG), employs various monetary policy tools to manage inflation and control the circulation of currency in the economy. One of the primary tools used is the reserve requirement, along with open market operations.

Reserve Requirements

Reserve requirements refer to the minimum amount of reserves that banks must hold against their deposits. This tool can influence the amount of money that banks can lend out, thereby impacting the overall money supply in the economy.

  1. Function of Reserve Requirements:

    • Controlling Inflation: By increasing reserve requirements, the BPNG can reduce the amount of money that banks can lend. This reduction in lending can help to decrease the money supply, leading to lower inflation.
    • Stabilizing the Banking System: A higher reserve requirement ensures that banks have enough liquidity to meet withdrawal demands, which can stabilize the banking sector, especially during financial uncertainty.

  2. Impact on Currency Circulation:

    • When reserve requirements are raised, banks hold more money as reserves and are less able to extend credit, thus tightening the money supply.
    • Conversely, reducing reserve requirements can stimulate borrowing and, hence, increase the money supply, which may be used during periods of economic slowdown.

Open Market Operations (OMO)

Open market operations refer to the buying and selling of government securities in the open market by the central bank to regulate the money supply.

  1. Function of OMOs:

    • Controlling Inflation: During inflationary periods, the BPNG may sell government securities to absorb excess liquidity from the economy. This action decreases the money supply, which can help in controlling inflation.
    • Stimulating Economic Activity: Conversely, if the economy is sluggish, the BPNG might buy government securities, injecting liquidity into the system to encourage lending and investment.

  2. Examples of Open Market Operations:

    • Selling Treasury Bills: The BPNG can sell Treasury Bills in large quantities to absorb money from the banking system, which can help in delaying inflation.
    • Purchasing Treasury Bonds: In situations where the BPNG wants to lower interest rates and increase the liquidity in the market, buying these securities supports the bond prices and encourages lending by banks.

Conclusion

The Bank of Papua New Guinea utilizes reserve requirements and open market operations as tools to manage inflation effectively. By manipulating these tools, the central bank can influence the money supply, maintain price stability, and stabilize the banking system.

References

Here are some references you can explore further to understand the operations of the Central Bank of PNG and its monetary policy tools:

  1. Bank of Papua New Guinea. (n.d.). Monetary Policy Framework. Retrieved from Bank of PNG official website
  2. Bank of Papua New Guinea. (2021). Annual Report. Retrieved from Bank of PNG official website
  3. Cossar, E. (2022). Monetary Policy in Papua New Guinea: An Overview. Pacific Economic Bulletin.
  4. International Monetary Fund. (2020). Papua New Guinea: Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Papua New Guinea. Retrieved from IMF website

These references contain comprehensive insights into how BPNG manages its monetary policy and controls inflation through various measures.