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The Basics: How Central Banks Originated and Their Role Today. The central bank started out as the government’s bank and over the years added various other functions. A modern central bank not only manages the government’s finances but provides an array of services to commercial banks.
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The Basics: How Central Banks Originated and Their Role Today • The central bank started out as the government’s bank and over the years added various other functions. • A modern central bank not only manages the government’s finances but provides an array of services to commercial banks.
What Do Central Banks Do? • The central bank can control the availability of money and credit in a country's economy. • Most central banks go about this by adjusting short-term interest rates: monetary policy. • They use it to stabilize economic growth and information. • Central banks generally do not control fiscal policy.
How Do Central Banks Control Interest Rates? Conventional Monetary Policy:
Interest Rates • There are three interest rates, at least in the United States, though many countries have comparable rates: • The federal funds rate, • The discount rate, and • The deposit rate. • These are the primary tools of monetary policy during normal times. • In a financial crisis, central banks may also adjust the size and composition of their balance sheet.
Unconventional Monetary Policy • Open Market Operations • Quantitative Easing: Central bank purchases securities from commercial banks, giving banks more ability to lend • Risk of inflation, but possible risk of additional economic problems without unconventional measures • A matter of balance
