LS20- Role of Central Banks

Question 1

Role of the central bank

Answer 1

• to implement monetary policy through manipulation of interest rates, the money supply and the exchange rate to meet an inflation target
• to act as a banker to the government where government bonds can be bought and sold on behalf of the government and debt interest can be managed down with the central bank also offering economic advice
• banker to banks- lender of last report (if banks experience liquidity problems)
• regulator of the financial system- both FPC and PRA are regulatory bodies within the BoE to look out for risks to financial stability

Question 2

Examples of central banks

Answer 2

• Bank of England (UK)
• European Central Bank (ECB)
• United States Federal Reserve (The Fed)
• Bank of Japan
• Reserve Bank of Australia

Question 3

Main functions of a central bank

Answer 3

• monetary policy function
• financial stability and regulatory function
• policy operation functions
• debt management

Question 4

Monetary policy function

Answer 4

• setting of the main monetary policy interest rate (base rate)
• deciding on whether to use and the scale of quantitative easing
• possible exchange rate intervention in a managed floating or a fixed currency system

Question 5

Financial stability and regulatory function

Answer 5

• supervision of the stability of the wider financial system
• prudential policies designed to maintain financial stability during times of crisis and high volatility

Question 6

Policy operation functions

Answer 6

• lender of last resort to the banking system when commercial banks face liquidity crisis
• managing liquidity in the commercial banking system so that they continue to lend to each other
• overseeing the payment systems used by banks/retailers/credit card companies