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Central Banks

Date Added: December 06, 2010 03:00:44 PM
A central bank is defined as any financial institution that controls the monetary policy of a country. Central banks usually have various mandates, which include issuing currency, maintaining currency value, ensuring the stability of the financial system, acting as banker for the government, controlling the credit supply, and serving as a lender to other financial institutions in times of need. In some countries the Central Bank is an independent financial institution, while in others it is administrated by the government. Theoretically, an independent central bank is supposed to be free of any political influence; however, in some cases this is not true.

Well-Known Central Banks

Some of the most commonly mentioned and prominent central banks are the Bank of England, US Federal Reserve, Bank of Japan, Bank of Canada, and European Central Bank. Some central bank's govern the monetary policy of a single nation (such as the US Federal Reserve), while others oversee the currencies of multiple nations (such as the European Central Bank). Although there is no set rules as to how central banks are named, the syntax is usually similar to one few the following – Central Bank of (Country Name Here), (Country Name Here) National Bank, or simply Bank of (Country name Here).

Central Bank Duties

Central banks are responsible for managing the monetary policy of their country, which includes issuing currency, maintaining precious metals and Forex reserves, managing credit costs by governing interest rates, and managing the money supply of the country. In general, the rules and regulations set forth by the central bank are used to control the stability and security of a county's economic activity. Thus, central banks are expected to help the country avoid recessions, facilitate the growth of the economy, and keep inflation in check. Central banks also use open market operations to control the total amount of money circulating in a country's economy. Open market operations are basically purchases or sales of government securities. When government securities are purchased by the central bank, the money supply expands, while selling government securities will lessen the money supply.

Central Banks and Interest Rates

Central banks have the ability to set short-term interest rates (also known as the overnight interbank lending rate), which can have a profound effect on the economy. In effect, when the short-term interest rate is lowered, the cost of credit is also lowered, thereby providing incentive for business owners and individuals to borrow and subsequently stimulate the economy. On the other hand, the central bank may raise short-term interest rates in order to discourage people from borrowing during times of inflation. Central banks have the power to shape and shift economies at will, and are integral aspects of the world banking system.