Learning Objectives:
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Define the role and functions of a central bank.
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Understand the instruments of monetary policy.
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Analyse the relationship between central banks and commercial banks.
5.1 The Role and Functions of Central Banks
The University of Sussex module covers “theory of central bank and monetary policy” . The BUSN 1180 course covers “monetary policy” as a core topic . The National University Library’s FIN453 module includes a resource on “What is the purpose of the Federal Reserve System?” explaining that the Federal Reserve was created “to provide the nation with a safer, more flexible, and more stable monetary and financial system” .
Core Functions of Central Banks:
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Monetary Policy:Â Controlling the money supply and interest rates.
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Financial Stability:Â Overseeing the stability of the financial system.
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Payment System Oversight:Â Ensuring the smooth functioning of payment systems.
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Lender of Last Resort:Â Providing emergency liquidity to banks.
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Banker to Government:Â Managing government accounts and debt issuance.
Key Central Banks:
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US Federal Reserve:Â The central bank of the United States.
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European Central Bank (ECB):Â The central bank of the Eurozone.
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Bank of England:Â The central bank of the United Kingdom.
5.2 Instruments of Monetary Policy
The course covers “central banks, the money supply & monetary policy” . Key instruments include:
Interest Rates: Policy rates such as the federal funds rate in the US or the ECB’s main refinancing rate. The NPUST Money and Banking course covers “The behavior of interest rate” and “The risk and term structure of interest rate” as core topics .
Reserve Requirements:Â The amount of reserves banks must hold. Changes in reserve requirements affect the money multiplier and banks’ ability to lend.
Open Market Operations:Â Buying and selling government securities to influence the level of bank reserves and short-term interest rates.
Quantitative Easing:Â Large-scale asset purchases to stimulate the economy when conventional monetary policy is exhausted.
5.3 Central Banks and Commercial Banks
The relationship between central banks and commercial banks is fundamental. Commercial banks hold reserves at the central bank, and the central bank acts as the banker to commercial banks. The course notes that “international capital flows, channeled by banks and other financial intermediaries” are central to economic development .
The Money Supply Process:Â The process by which central bank actions affect the money supply and credit conditions in the economy.
Monetary Policy Transmission: The process by which monetary policy decisions affect the real economy through interest rates, credit conditions, and asset prices..