Financial Glossary

 

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List of central banks Central banks and currencies of Africa Central banks and currencies of Asia-Pacific Central banks and currencies of the Caribbean Central banks and currencies of Europe Central banks and currencies of Central America and South America. The exchange banks thus fulfilled comparable functions to modern central banks.

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Thus, the effective GST incidence on the wholesaler is only Rs 2 15 — In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs , he adds value, or margin, of, say, Rs But by setting off this tax Rs 16 against the tax on his purchase from the wholesaler Rs 15 , the retailer brings down the effective GST incidence on himself to Re 1 16 — How it would be in a non-GST regime? The gross value of the shirt good he manufacturers would be Rs , on which he pays a tax of Rs With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then, Rs On this, the tax of Rs The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer.

The retailer, thus, buys the good at Rs Compare this Rs Dear chirag, Thank you for explaining the GST mechanism in a detailed way. Also, some for some sectors it can have a negative impact.

But overall, it is a positive factor for our economy in long-run. And a much needed tax reform. If answer to the above questions are yes, then will producer state loose revenue and consumer states will gain revenues?

Thanks for nice article, Since stock market is down from last 5 days so Sreekanth, do you think its nice time to do the lumpsum investment, considering GST will have positive impact on economy in long term. Dear Prem, GST can be considered as a major tax reform but the benefits may be seen over a long run.

Also, kindly do not try to time the market based on just one or two events. Nice article… I have one doubt. Basic custom duty include in Gst. Now I apply voluntary vat for my ecommerce in maharashtra, so how i collect my deposit back after gst,. This article was very simple to understand as well as informative. Do you think GST is a researchable topic?

GST may result to increase revenue to central government and states will could not found reasonable revenue from central government and also it may benefit to common people end consumers instead of hassling from various tax levies.

However, prices of under-construction properties might get affected increase once the GST rolls out, but this again depends on the exact gst tax rate. Can you please explain it to me by giving an example, which compares the current Tax value and the Tax value after GST? So, what is the tax that I am paying today and what will be the tax that I will pay after GST is implemented. I had an ice cream in Ibaco.

They have charged me VAT So, the total taxes is more than the assumed GST rate. There are lot of confusions in this bill. While a single tax structure is good as it simplifies the system and corruption will also reduce but it will not benefit the end user. For example, if I go to cinema theater to watch a movie then I should be paying only entertainment tax, why I should pay VAT as no value is added when the movie comes to a theater, why I should pay service tax as no service is provided at the theaters,why I should pay all goods related taxes as their are no goods involved here.

With GST I am paying all these extra charges. At the cloth store why I should pay entertainment tax? I think GST has lot of flaws. The best solution is to separate goods and services taxes and abolish VAT altogether. This way the end user will be taxed only for either the goods or services and not both.

VAT is being abolished all over the world and it should be abolished in India too as it encourages lot of corruption. Thank you for sharing your views. It also depends on the rate of tax. It may balance it out?? Because, they have to generate funds at the end of the day. I agree with Manohar jee. Business sector will certainly get benefited, but the end user and especially a middle class and lower, will get affected.

But i think we will get habituated to GST also after few months. Initially we discuss like and this and everybody becomes part and parcel of the system, as we have to abide by! Thank for such a valuable information……… but i am of the opinion that the common man defiantly suffer in because of GST. The GST Bill will be passed certainly.

As you said just it is a political game to not to claim the credit by BJP. First the UPA Govt. Finally they will combine to pass the bill. Any how that is different issue. But finally what I am feeling that only corporate people , manufactures, retailers and service providers only will get more benefits. But ultimately the end user or consumer will suffer a lot. It is dam sure that all thee goods and services prices will increase.

And no one has right to stop the prices. So that the inflation increases. Dear Krishna, Thank you for sharing your views. In most of scenarios, it is the middle-man who make lot of profits.

The end-user is always at the receiving end. Dear Sreekanth, this is a very beautiful article. It is very well written in a manner that even a non-financial guy like me can understand.

Keep up the great work. Will look forward to your other articles as I have bookmarked your page. Is there a government website where a common man like us can track the status of the GST bill progression?

However, to their vein, the GST bill still did not pass. What is the reason? Or is it that general people outside of business entities should also apply through a petition?

Please share some knowledge. You clearly mentioned that states are reluctant to GST because they might lose revenues. Given the stupidity of so much tax levied, obviously any person would want to avoid ridiculous tax cascades, and they end up paying a bribe. In other words, as you rightly mentioned, the high corruption in india is a direct result for so many taxes, and GST, being an indirect tax, will also indirectly eliminate or at least reduce rampant corruption.

My question therefore is, what resolution is the center providing to the states, to assure them of getting a better revenue if GST is enforced? Because clearly, more people would come out in the open to pay taxes legally, when it is a reasonable amount. Because clearly, no developed country would have instilled the GST like over countries , without this having a greater benefit in the long run.

Sorry to post such a large comment, however, thanks to your clearly explained article, I am thinking of setting up an online petition for GST by writing in a manner as to how it would benefit the common man. What are your thoughts?

Or would you suggest that given the current central govt scenario, the GST will eventually get passed? There will be challenges or initial hicups after the implementation, but the benefits will be immense over the long-run.

But the current opposition parties are stalling it due to political differences and nothing else. They may not like to pass on the credit of GST bill implementation to the current govt. Hence, I believe that Bihar elections are key to the govt and its future plans to aggressively push the much needed economic reforms.

Thank you Sreekanth, for the prompt reply! Praying for the bihar results. Just found your page on facebook. Look forward to check up on your page regularly. Again, keep up the great writing work. Wishing your more success. As our business is expanding we will shortly be exceeding the exemption limit for excise. In excise unit separate premise have to be maintained with various registers to be maintained to avail modvat credit. For small to medium manufacturer where trading activity is also involved it is difficult to maintain all the records.

If GST is implemented will there be any change in record keeping for excise units. Excellent presentation of the topic. Do you think which are the sectors that will benefit after the implementation of gst? Dear Raghav, Thank you! There are lot of players companies in different sectors who fall under unorganized category. Most of these companies will come under tax regime after the implementation of GST.

This will lead to reduction in their competitiveness compared withe organized players. Hence companies which fall under these sectors can benefit. Please log in again. The login page will open in a new window. After logging in you can close it and return to this page. Very nicely explained, thank you sir. Reddy, simply super information, any body can understand, keep educating us. Many thanks and very best regards.

Please also read my blogs on the following link related to GST: Please like, share and subscribe the channel and video for sharing the gaining the knowledge: Dear Sir, I am your fan suches u r a ginias Explained clearly thank u very much sir.

It is lke claiming Refund to offset the tax liability. Very good article to know About GST. I do not have the required expertise on GST. Kindly consult a CA. Dear Sir, We are doing sales and Services business you can say trading business.

Good article in simple language. Overall CAS practice will shrink! As of now, I do not have answer to your question. You may kindly check with a CA. Everybody discuss regarding advantage of GST…. Is there any disadvantage. Thank you so much dear sushanta for sharing your views..

Bank of England which, despite its name, is in fact the central bank of the United Kingdom as a whole. The name's lack of representation of the entire United Kingdom 'Bank of Britain', for example can be owed to the fact that its establishment occurred when the Kingdoms of England , Scotland and Ireland were separate entities at least in name , and therefore pre-dates the merger of the Kingdoms of England and Scotland , the Kingdom of Ireland's absorption into the Union and the formation of the present day United Kingdom , Bank of Canada , Bank of Mexico , Bank of Thailand.

There is an instance where native language was used to name the central bank: Some are styled "national" banks, such as the Swiss National Bank , National Bank of Poland and National Bank of Ukraine , although the term national bank is also used for private commercial banks in some countries such as National Bank of Pakistan. In some countries, particularly in formerly Communist ones, the term national bank may be used to indicate both the monetary authority and the leading banking entity, such as the Soviet Union 's Gosbank state bank.

Many countries have state-owned banks or other quasi-government entities that have entirely separate functions, such as financing imports and exports. In other countries, the term national bank may be used to indicate that the central bank's goals are broader than monetary stability, such as full employment, industrial development, or other goals.

Some state-owned commercial banks have names suggestive of central banks, even if they are not: After the Financial crisis of — central banks led change, but as of their ability to boost economic growth has stalled.

Central banks debate whether they should experiment with new measures like negative interest rates or direct financing of government, "lean even more on politicians to do more". Andy Haldane from the Bank of England said "central bankers may need to accept that their good old days — of adjusting interest rates to boost employment or contain inflation — may be gone for good".

The European Central Bank and The Bank of Japan whose economies are in or close to deflation , continue quantitative easing — buying securities to encourage more lending. Central banks implement a country's chosen monetary policy.

At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a fiat currency , gold-backed currency disallowed for countries in the International Monetary Fund , currency board or a currency union.

When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: Historically, this was often a promise to exchange the money for precious metals in some fixed amount.

Now, when many currencies are fiat money , the "promise to pay" consists of the promise to accept that currency to pay for taxes. A central bank may use another country's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by the Bulgarian National Bank , Hong Kong and Latvia , the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency.

Similar to commercial banks, central banks hold assets government bonds, foreign exchange, gold, and other financial assets and incur liabilities currency outstanding. Central banks create money by issuing interest-free currency notes and selling them to the public government in exchange for interest-bearing assets such as government bonds. When a central bank wishes to purchase more bonds than their respective national governments make available, they may purchase private bonds or assets denominated in foreign currencies.

The European Central Bank remits its interest income to the central banks of the member countries of the European Union. This income, derived from the power to issue currency, is referred to as seigniorage , and usually belongs to the national government.

The state-sanctioned power to create currency is called the Right of Issuance. Throughout history there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income.

The expression "monetary policy" may also refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority. Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. Unemployment beyond frictional unemployment is classified as unintended unemployment.

For example, structural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Macroeconomic policy generally aims to reduce unintended unemployment. Keynes labeled any jobs that would be created by a rise in wage-goods i. Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to a currency.

Since inflation lowers real wages , Keynesians view inflation as the solution to involuntary unemployment. However, "unanticipated" inflation leads to lender losses as the real interest rate will be lower than expected. Thus, Keynesian monetary policy aims for a steady rate of inflation. A publication from the Austrian School , The Case Against the Fed , argues that the efforts of the central banks to control inflation have been counterproductive.

Economic growth can be enhanced by investment in capital , such as more or better machinery. A low interest rate implies that firms can borrow money to invest in their capital stock and pay less interest for it.

Lowering the interest is therefore considered to encourage economic growth and is often used to alleviate times of low economic growth. On the other hand, raising the interest rate is often used in times of high economic growth as a contra-cyclical device to keep the economy from overheating and avoid market bubbles.

Further goals of monetary policy are stability of interest rates, of the financial market, and of the foreign exchange market. Goals frequently cannot be separated from each other and often conflict. Costs must therefore be carefully weighed before policy implementation. The main monetary policy instruments available to central banks are open market operation , bank reserve requirement , interest rate policy , re-lending and re-discount including using the term repurchase market , and credit policy often coordinated with trade policy.

While capital adequacy is important, it is defined and regulated by the Bank for International Settlements , and central banks in practice generally do not apply stricter rules.

By far the most visible and obvious power of many modern central banks is to influence market interest rates; contrary to popular belief, they rarely "set" rates to a fixed number. Although the mechanism differs from country to country, most use a similar mechanism based on a central bank's ability to create as much fiat money as required. The mechanism to move the market towards a 'target rate' whichever specific rate is used is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target.

Central banks may do so by lending money to and borrowing money from taking deposits from a limited number of qualified banks, or by purchasing and selling bonds. As an example of how this functions, the Bank of Canada sets a target overnight rate , and a band of plus or minus 0.

Qualified banks borrow from each other within this band, but never above or below, because the central bank will always lend to them at the top of the band, and take deposits at the bottom of the band; in principle, the capacity to borrow and lend at the extremes of the band are unlimited.

The target rates are generally short-term rates. The actual rate that borrowers and lenders receive on the market will depend on perceived credit risk, maturity and other factors. For example, a central bank might set a target rate for overnight lending of 4.

Many central banks have one primary "headline" rate that is quoted as the "central bank rate". In practice, they will have other tools and rates that are used, but only one that is rigorously targeted and enforced. The Fed sets a target for the Fed funds rate, which its Open Market Committee tries to match by lending or borrowing in the money market The Fed is the head of the central-bank because the U.

The global money market is a USA dollar market. All other currencies markets revolve around the U. Typically a central bank controls certain types of short-term interest rates. These influence the stock- and bond markets as well as mortgage and other interest rates. The European Central Bank for example announces its interest rate at the meeting of its Governing Council; in the case of the U.

Both the Federal Reserve and the ECB are composed of one or more central bodies that are responsible for the main decisions about interest rates and the size and type of open market operations, and several branches to execute its policies. A typical central bank has several interest rates or monetary policy tools it can set to influence markets.

Some central banks eg. Through open market operations , a central bank influences the money supply in an economy. Each time it buys securities such as a government bond or treasury bill , it in effect creates money. The central bank exchanges money for the security, increasing the money supply while lowering the supply of the specific security. Conversely, selling of securities by the central bank reduces the money supply.

All of these interventions can also influence the foreign exchange market and thus the exchange rate. Treasuries , presumably in order to stop the decline of the U. When faced with the zero lower bound or a liquidity trap, central banks can resort to quantitative easing QE. Like open market operations, QE consists in the purchase of financial assets by the central bank. There are however certain differences:.

All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the central bank or the banking supervisor. Partly due to concerns about asset inflation and repurchase agreements , capital requirements may be considered more effective than reserve requirements in preventing indefinite lending: Historically, bank reserves have formed only a small fraction of deposits , a system called fractional reserve banking. Banks would hold only a small percentage of their assets in the form of cash reserves as insurance against bank runs.

Over time this process has been regulated and insured by central banks. Such legal reserve requirements were introduced in the 19th century as an attempt to reduce the risk of banks overextending themselves and suffering from bank runs , as this could lead to knock-on effects on other overextended banks.

See also money multiplier. As the early 20th century gold standard was undermined by inflation and the late 20th century fiat dollar hegemony evolved, and as banks proliferated and engaged in more complex transactions and were able to profit from dealings globally on a moment's notice, these practices became mandatory, if only to ensure that there was some limit on the ballooning of money supply.

Such limits have become harder to enforce. The People's Bank of China retains and uses more powers over reserves because the yuan that it manages is a non- convertible currency. Loan activity by banks plays a fundamental role in determining the money supply.

The central-bank money after aggregate settlement — "final money" — can take only one of two forms:. The currency component of the money supply is far smaller than the deposit component. Currency, bank reserves and institutional loan agreements together make up the monetary base, called M1, M2 and M3.

The Federal Reserve Bank stopped publishing M3 and counting it as part of the money supply in Central banks can directly control the money supply by placing limits on the amount banks can lend to various sectors of the economy. This allows the central bank to control both the quantity of lending and its allocation towards certain strategic sectors of the economy, for example to support the national industrial policy. The Bank of Japan used to apply such policy "window guidance" between and To influence the money supply, some central banks may require that some or all foreign exchange receipts generally from exports be exchanged for the local currency.

The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. This tool is generally used in countries with non-convertible currencies or partially convertible currencies.

The recipient of the local currency may be allowed to freely dispose of the funds, required to hold the funds with the central bank for some period of time, or allowed to use the funds subject to certain restrictions. In other cases, the ability to hold or use the foreign exchange may be otherwise limited. In this method, money supply is increased by the central bank when it purchases the foreign currency by issuing selling the local currency.

The central bank may subsequently reduce the money supply by various means, including selling bonds or foreign exchange interventions. In some countries, central banks may have other tools that work indirectly to limit lending practices and otherwise restrict or regulate capital markets. For example, a central bank may regulate margin lending , whereby individuals or companies may borrow against pledged securities.

The margin requirement establishes a minimum ratio of the value of the securities to the amount borrowed. Central banks often have requirements for the quality of assets that may be held by financial institutions; these requirements may act as a limit on the amount of risk and leverage created by the financial system.

These requirements may be direct, such as requiring certain assets to bear certain minimum credit ratings , or indirect, by the central bank lending to counterparties only when security of a certain quality is pledged as collateral. Although the perception by the public may be that the "central bank" controls some or all interest rates and currency rates, economic theory and substantial empirical evidence shows that it is impossible to do both at once in an open economy. Robert Mundell 's " impossible trinity " is the most famous formulation of these limited powers, and postulates that it is impossible to target monetary policy broadly, interest rates , the exchange rate through a fixed rate and maintain free capital movement.

Since most Western economies are now considered "open" with free capital movement, this essentially means that central banks may target interest rates or exchange rates with credibility, but not both at once. Since then he has been a harsh critic of clumsy bank policies and argued that no one should be able to do what he did.

The most complex relationships are those between the yuan and the US dollar , and between the euro and its neighbors. US dollars were ubiquitous in Cuba's economy after its legalization in , but were officially removed from circulation in and replaced by the convertible peso. Some have envisaged the use of what Milton Friedman once called " helicopter money " whereby the central bank would make direct transfers to citizens [38] in order to lift inflation up to the central bank's intended target.

Such policy option could be particularly effective at the zero lower bound. In some countries a central bank, through its subsidiaries, controls and monitors the banking sector. In other countries banking supervision is carried out by a government department such as the UK Treasury , or by an independent government agency, for example, UK's Financial Conduct Authority. It examines the banks' balance sheets and behaviour and policies toward consumers.

Thus it is often described as the "bank of banks". Many countries will monitor and control the banking sector through several different agencies and for different purposes. There is usually significant cooperation between the agencies. For example, money center banks , deposit-taking institutions , and other types of financial institutions may be subject to different and occasionally overlapping regulation. Some types of banking regulation may be delegated to other levels of government, such as state or provincial governments.

Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergers and are wary of concentration in this industry due to the danger of groupthink and runaway lending bubbles based on a single point of failure , the credit culture of the few large banks.

Governments generally have some degree of influence over even "independent" central banks; the aim of independence is primarily to prevent short-term interference. The Deutsche Bundesbank was the first central bank to be given full independence, leading this form of central bank to be referred to as the "Bundesbank model", as opposed, for instance, to the New Zealand model, which has a goal i.

Advocates of central bank independence argue that a central bank which is too susceptible to political direction or pressure may encourage economic cycles " boom and bust " , as politicians may be tempted to boost economic activity in advance of an election, to the detriment of the long-term health of the economy and the country.

In this context, independence is usually defined as the central bank's operational and management independence from the government. Central bank independence is usually guaranteed by legislation and the institutional framework governing the bank's relationship with elected officials, particularly the minister of finance. Central bank legislation will enshrine specific procedures for selecting and appointing the head of the central bank.

Often the minister of finance will appoint the governor in consultation with the central bank's board and its incumbent governor. In addition, the legislation will specify banks governor's term of appointment. The most independent central banks enjoy a fixed non-renewable term for the governor in order to eliminate pressure on the governor to please the government in the hope of being re-appointed for a second term.

In return to their independence, central bank are usually accountable at some level to government officials, either to the finance ministry or to parliament. For example, the Board of Governors of the U. Federal Reserve are nominated by the President of the U. In the s there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance.

While a large volume of economic research has been done to define the relationship between central bank independence and economic performance, the results are ambiguous. The literature on central bank independence has defined a cumulative and complementary number of aspects: It is argued that an independent central bank can run a more credible monetary policy, making market expectations more responsive to signals from the central bank.

Even the People's Bank of China has been accorded great latitude, though in China the official role of the bank remains that of a national bank rather than a central bank, underlined by the official refusal to "unpeg" the yuan or to revalue it "under pressure". The People's Bank of China's independence can thus be read more as independence from the USA, which rules the financial markets, rather than from the Communist Party of China which rules the country.

The fact that the Communist Party is not elected also relieves the pressure to please people, increasing its independence.