A central bank is an entity that handles a country’s or set of nations’ currency and regulates the money supply. A central bank is often an independent entity with a national charter to act in the best interest of its country or group of countries. Although this may sound like a simple concept, it is important to note that there are two central bank models: a government-owned institution and a privately owned institution. The government-owned model is most common. In fact, most central banks in the world are government-owned. The privately owned model can be seen in the United Kingdom where the Bank of England is owned by the shareholders of the bank and operated to maximize the value of their investment. Central bank models are very different from one another and have different goals. The point of all this is to note that each central bank is unique in how it operates and how its policies influence the economy of the country or countries it is responsible for.How a central bank really works ?The reality of how a central bank really works is far more complex than what we have seen thus far. While the previous descriptions of a central bank offer an understanding of how a central bank operates, they do not provide details on how the institution actually functions or how it interacts with a country’s economy. In the following, we will look at the different roles and responsibilities of a central bank, as well as how it makes decisions, influences the economy, and interacts with the government.The four roles of a central bankIn an effort to understand the true role of a central bank, we need to look at the functions that it is required to perform in its role as a national bank and lender of last resort.We will look at the four primary roles that are expected of a central bank:1- The monetary policy role of a central bank2- The supervisory role of a central bank3- The lender of last resort function of a central bank4- Its oversight function with respect to financial institutionsCentral banks play an important role in the economy by influencing interest rates and the availability of credit. When a central bank lowers interest rates, it makes it cheaper for businesses to borrow money which can help stimulate economic growth. When a central bank restricts credit by raising interest rates, it can help control inflation by making it more expensive for consumers to borrow money. By regulating financial institutions, central banks can ensure that they are operating safely and soundly which helps protect against another financial crisis like we saw in 2008.The Federal Reserve is America's central bank and is responsible for managing our currency and monetary policy. The Fed plays an important role in our economy by influencing interest rates, providing liquidity during times of stress, and helping maintain price stability . Some people argue that the Fed has too much power over our economy while others believe that they provide critical support when needed most . I believe that having a strong central bank is essential to ensuring economic stability and should be supported by everyone.
