Central Bank

A Central Bank is an institution responsible for formulating and implementing country's monetary policy. Most central banks have similar responsibilities, which usually include ensuring price stability via stable currency, controlling the money supply (the money in the national economy), ensuring financial system stability, overseeing the commercial banks, issuing the official country's currency, acting as government's lender and setting short-term interest rates. Usually the central bank manages the foreign exchange reserves and the gold reserves of the country. In most cases the central bank of a country is fully or at least partially independent from the country's government.

The most powerful central bank in the world is without question the US Federal Reserve. Other key central banks are the European Central Bank, which is serves as a central bank for the euro currency zone, the Bank of England, the Bank of Japan, the Bank of Canada, the People's Bank of China, the Swiss National Bank, the Bank of Russia, central Bank of Brazil, and the Reserve Bank of Australia.

Monetary Policy

Every central bank's main task is setting and implementing of the monetary policy of their country. The monetary policy is designed to affect the economy, control inflation, keep the currency stable and help sustainable economic expansion, while maintaining low unemployment.

The central banks have several tools, which they use to implement their monetary policy. The monetary policy of a country is very closely related to controlling the money supply in the economy, and this control can be achieved through selling or buying government securities in the open markets (this is known as open market operations). Another way to affect the money supply is to change the reserve requirements for commercial banks. When the central bank increase the reserve requirements, the money supply decreases and when it lowers the reserve requirements it expands the monetary base. The central bank also set short-term interest rates, thus indirectly affecting the money supply. When the central bank aims for lower interest rates, credit becomes cheaper and new money enter the economy through loans, but when the interest rates are rising the lending slows pace and the money supply decreases. The central banks also act as banker's banker, loaning to commercial banks, which allow them to affect the money supply directly.