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At times, Central Banks buy currency to manipulate the supply of money in a jurisdiction. They require that a few or all receipts from foreign exchange, especially from exports, be exchanged for the local currency. The rate used to buy local currency is either market-based or randomly positioned by the bank. In most cases, random positioning of the exchange rate is used if the currency in a nation is partially-convertible. Through purchase of foreign currency, central banks are able to facilitate the supply of local currency. Nevertheless, whenever they deem it necessary, they may decrease the supply of local currency through, for example, issuing of bonds or providing foreign exchange intercessions.
In an effort to stabilize economies, several central banks introduced stimulus packages with an aim of bailing out troubled institutions. Others zero rated their strategic interest rates and intervened in stabilizing the economies of several other nations in order to shun the menace of deflationary spiral. By the last quarter of the year 2008, central banks had purchased US$2.75 trillion worth of governments’ and private sector debt. Among the major players included the Bank of China with a commitment of US$586 billion, the Bank of England which committed US$ 876 billion, the European Central Bank with US$ 288 billion, and the Federal Reserve with a US$ 1 trillion allocation (GEAB, 2006). Countries around the world, injected a lot of cash in an effort to reduce the impact of the crisis on their domestic economies. They cut their temporary interest rates by almost half a percentage point. This reduced the governments’ earning, which in effect impacted on service delivery.
There was widespread concern that many governments would find it challenging to repay their debts. The concern disarrayed policy formulation by central banks, and on several occasions, this led to constraints in determining the limits of funding to be injected in the market. The delays contributed to multiple collapses, a situation that aggravated the crisis. Inflationary targeting based on Taylor’s rule as well as the Conventional Theoretical Macroeconomic Model appeared elusive. When these approaches failed, the American government began to introduce targeted tax incentives to corporations in an endeavor to keep them afloat. Ostensible success during the initial stages of their implementation inspired several other nations to follow suit in a move to discourage the ultimate closure of unprofitable companies. In spite of the challenges, the unprecedented crises-intervention steps that were taken by central banks in pursuing hassle-free monetary policies were necessary as liquidity is essential in tackling such crises.