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  • Writer's pictureLee A. Blackman

What Central Banks Do?

Central Bank van Curacao & Sint Maarten - Sint Maarten branch office

By Reem Heakal

What Is a Central Bank?

The central bank has been described as the "lender of last resort," which means it is responsible for providing its nation's economy with funds when commercial banks cannot cover a supply shortage. In other words, the central bank prevents the country's banking system from failing.

However, the primary goal of central banks is to provide their countries' currencies with price stability by controlling inflation. A central bank also acts as the regulatory authority of a country's monetary policy and is the sole provider and printer of notes and coins in circulation. Time has proved that the central bank can best function in these capacities by remaining independent from government fiscal policy and therefore uninfluenced by the political concerns of any regime. A central bank should also be completely divested of any commercial banking interests.

Key Takeaways

  • Central banks carry out a nation's monetary policy and control its money supply, often mandated with maintaining low inflation and steady GDP growth.

  • On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.

  • Central banks also operate on a micro scale, setting commercial banks' reserve ratio and acting as lender of last resort when necessary.


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