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Roles and objectives of a central bank

In a modern economy, a central bank is the sole supplier of currency. Since most economies, today do not follow the gold standard, which means that its central banks issue money, called fiat money, backed only by the government decree that the issued currency is a legal tender. Hence, central banks have a paramount responsibility to maintain and protect the value of their currencies.

Central banks also act as banker to the government which means that it takes care of the government's banking needs, for example, in handling the governments' receipts and payments, auctions of government debt, etc.

A central bank is the lender of last resort when it provides liquidity to financial institutions in distress. Further, it regulates, supervises and improves a country’s payments system, manages its foreign currency and gold reserves, conducts monetary policy and supervises the banking system (sometimes together with other agencies).

The objectives of monetary policy

Even though all the roles of central banks discussed above translate into their objectives, maintaining price stability is the most overarching aim of central banks. For example, the objective of the US Federal Reserve is “to promote the objectives of maximum employment, stable prices, and moderate long- term interest rates.”

MCQs

With regard to which the following roles, a central bank typically has monopoly power?

A) Supply of currency.
B) Regulation and supervision of the banking system.
C) Manages a country’s foreign reserves

Show answer

A is correct. Generally, central banks are the monopoly suppliers of currency. All other roles may be less exclusive.

by Obaidullah Jan, ACA, CFA on Tue Feb 11 2020

This article can help you prepare for Reading 16 LOSf.

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