the situation of the country if it does

not have a central bank

central bank is controlled or at least intervened by government. Under these conditions, if the

central bank knows the public's expectations, then central banks tend to create inflation shocks

to increase income seignorage and encourage real economic activity. Inflation will be higher

than it should be because inflation is a function of inflation expectations. In this case, the central

bank tend not to be credible, and it will be more difficult to control inflation.

There are three reasons why the central bank should be independent; First, public choice theory

explains that the central bank is under political pressure from the government to finance

government budget deficit through money policies that tend to be loose (Eijffinger, 1997).

Second, when the fiscal authority is dominant, the monetary authority will not be able to control

it government budget deficit, so the money supply becomes endogenous. This matter

possible when the central bank is not independent (Sargent and Wallace, 1981 quoted from

Eijffinger, 1997). Third, there is the problem of 'time inconsistency' or time inconsistency
when the policy is no longer optimal to respond to the actual plan (Kydland

and Prescott, 1977; Barro and Gordon, 1983; Rogoff, 1985).

As explained earlier, one solution to overcome the inflation bias is to

choose an independent and conservative central bank, (Rogoff, 1985; Barro and Gordon, 1984;

Walsh, 2003). The central bank becomes independent when it is free from political pressure or

intervention government, including free from government ambitions to increase seignorage that

This is done by increasing the money supply (Alesina and Summers, 1993). Furthermore,

an independent central bank should have only one goal, namely price stability, which

implies that the central bank is more focused on inflation than growth

outputs. Under these conditions, the central bank can formulate monetary policy to realize

price stability, free from any political intervention (Ahsan, 2006; Pollard, 1993).

Having the task of regulating and supervising microprudential can be carried out by

the central bank. Microeconomic and microfinance surveillance. The central bank also has the

instruments to provide microprudential policies. Financial system stability can also be

controlled by policies issued by the central bank. In carrying out microprudential tasks, the

central bank has the ability to analyze and project macroeconomics. The central bank also has

the ability to control the condition of financial markets, financial institutions, and financial

infrastructure. The role of the central bank in microprudential tasks can maintain the

performance of the economic system and provide financial system stability. Microprudential

regulation and supervision by the central bank can affect price and exchange rate stability. In

addition, the central bank generally conducts financial and economic assessments frequently.

The source of liquidity also generally comes from the central bank.

The central bank has an obligation to manage the country's foreign exchange reserves.

These foreign exchange reserves must be controlled by the central bank as the monetary

authority for state purposes. Foreign exchange reserves are managed by the central bank with
the aim of increasing a country's economic resilience when there is economic pressure. This

condition can occur in global financial markets. In addition, economic pressures can form

through problems in the domestic financial system. The central bank plays a role in the

management of foreign exchange reserves in the form of movements in the domestic currency

exchange rate. Monitoring is carried out through interaction with market participants. In

carrying out this task, the central bank must obtain correct and timely information. Economic

policy makers will obtain the results of the analysis of foreign exchange reserves management

based on market development monitoring information. Poor management of foreign exchange

reserves by the central bank can lead to potential economic problems and restrictions on the

monetary authority. Poor management of foreign exchange reserves by the central bank can

cause state losses financially.

So it can be concluded that if a country does not have a central bank, the stability of the currency

value, the stability of the banking sector, and the financial system as a whole will decline and

become unstable.