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Central banks have the mandate to preside over monetary policies. They may think of exchanging their foreign receipts with local currency. They have limited ability to hold or use foreign exchange in their various processes (Goodhart and Charles 1995). They increase money supply by purchasing foreign currency through local currency issuing and on the same reduce money supply through selling of bonds or interventions of foreign exchange.
Central banks eased their monetary policies with their interests reducing to zero following the stimulus announced in various countries that is China, Germany, Japan and UK. There were new facilities that helped stabilize credit markets which were brought about by the Federal Reserve and was done weekly (Cline 2010). This in turn fueled recognition in the major countries in the importance of coordinating the issuance of their debt so as to prevent de-stabilization of financial markets.
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The Federal Reserve together with central banks took some steps to expand supply of money and avoid risking in deflationary spiral where lower wages and high unemployment rate resulted to decline in global consumption. Central banks in 2008 bought $2.5 trillion consisting of government debt from banks which was the greatest liquidity injection in the credit market. Their efforts have succeeded as they try to cut their short-term rates of interest by fifty percent.
United state seemed to be more active in trying to curb the crisis than any other central banks. It managed to push federal money down from 5.25% to 1.5% and at the same time set aside inflation worries. I have to agree with the efforts put in place by the central banks in those times because of the liquidity requirement the world needed to curb the crisis of which the central banks provided by using relaxed policies in monetary issues.
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