This lesson examines the role and functions of central banks, focusing on the Federal Reserve System in the USA and the European System of Central Banks (ESCB). It covers the objectives, instruments, and operational frameworks of monetary policy in these two major economies.

• The Functions of Central Banks: Central banks have several core functions: conducting monetary policy, supervising financial institutions, providing banking services to the government and commercial banks, and ensuring the stability of the financial system. They act as “lenders of last resort” during financial crises .

• The Federal Reserve System (USA): The Fed, established in 1913, is the central bank of the United States. It is composed of the Board of Governors, 12 regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC). The Fed has a dual mandate: maximize employment and maintain price stability .

• Monetary Policy Tools of the Fed: The Fed uses three main tools to conduct monetary policy: open market operations (buying/selling government securities), the discount rate (interest charged to banks for borrowing from the Fed), and reserve requirements (the amount of reserves banks must hold). Open market operations are the most frequently used tool .

• The European Central Bank and ESCB: The European Central Bank (ECB) is the central bank for the euro area. It operates within the ESCB, which comprises the ECB and the national central banks of all EU member states. The primary objective of the ECB is price stability (inflation below, but close to, 2% over the medium term) .

• Monetary Policy in the Eurozone: The ECB uses similar tools to the Fed: open market operations, standing facilities, and reserve requirements. A key difference is that the ECB’s decisions affect multiple sovereign nations with different economic conditions. The ECB’s single monetary policy reflects the consensus of the Governing Council .