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Central bank

A central bank, reserve bank, national bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union.[1] In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Many central banks also have supervisory or regulatory powers to ensure the stability of commercial banks in their jurisdiction, to prevent bank runs, and in some cases also to enforce policies on financial consumer protection and against bank fraud, money laundering, or terrorism financing.

Central banks in most developed nations are usually set up to be institutionally independent from political interference,[2][3][4] even though governments typically have governance rights over them, legislative bodies exercise scrutiny, and central banks frequently do show responsiveness to politics.[5][6][7]


Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of macroeconomic policies[8] (monetary and fiscal policy) of the state are a focus of contention and criticism by some policymakers,[9] researchers[10] and specialized business, economics and finance media.[11][12]

"Bank of [Country]": e.g. (1791), Bank of France (1800), Bank of Java (1828), Bank of Japan (1882), Bank of Italy (1893), Bank of China (1912), Bank of Mexico (1925), Bank of Canada (1934), Bank of Korea (1950). The Bank of England has kept its original name of 1694, even though the Act of Union 1707 and Acts of Union 1800 expanded its remit to the broader United Kingdom.

Bank of the United States

"National Bank": e.g. (1850), Bulgarian National Bank (1879), Swiss National Bank (1907), National Bank of Poland (1945), National Bank of Ukraine (1991).

National Bank of Belgium

"State Bank": e.g. (1860), State Bank of Pakistan (1948), State Bank of Vietnam (1951); also former central banks of Communist countries, e.g. the State Bank of the USSR (or Gosbank, 1922) or the State Bank of Czechoslovakia (1950). "People's Bank", also associated with Communism, is used by the People's Bank of China.

State Bank of the Russian Empire

"Reserve Bank": in the U.S. (1913) and thereafter British colonies or dominions, e.g. South African Reserve Bank (1921), Reserve Bank of New Zealand (1934), Reserve Bank of India (1935), Reserve Bank of Australia (1960), Reserve Bank of Fiji (1984)

Federal Reserve

"Central Bank": e.g. (1924), Central Bank of the Republic of Turkey (1930), Central Bank of Argentina (1935), Central Bank of Ireland (1943), Central Bank of Paraguay (1952), Central Bank of Brazil (1964), European Central Bank (1998).

Central Bank of China

"Monetary Authority", e.g. (1971), Maldives Monetary Authority (1981), Hong Kong Monetary Authority (1993), Cayman Islands Monetary Authority (1997). The Saudi Arabian Monetary Authority (est. 1952) was renamed the Saudi Central Bank in 2020 but still uses the acronym SAMA.

Monetary Authority of Singapore

There is no universal terminology for the name of a central bank. Early central banks were often the only or principal formal financial institution in their jurisdiction, and were consequently often named "bank of" the relevant city's or country's name, e.g. the Bank of Amsterdam, Bank of Hamburg, Bank of England, or Wiener Stadtbank. Naming practices subsequently evolved as more central banks were established. They include, with references to the date when the bank acquired its current name:


In some cases, the local-language name is used in English-language practice, e.g. Sveriges Riksbank (est. 1668, current name in use since 1866), De Nederlandsche Bank (est. 1814), Deutsche Bundesbank (est. 1957), or Bangko Sentral ng Pilipinas (est. 1993).


Some commercial banks have names suggestive of central banks, even if they are not: examples are the State Bank of India and Central Bank of India, National Bank of Greece, Banco do Brasil, National Bank of Pakistan, Bank of China, Bank of Cyprus, or Bank of Ireland, as well as Deutsche Bank. Some but not all of these institutions had assumed central banking roles in the past.


The leading executive of a central bank is usually known as the Governor, President, or Chair.

Central bank mandates[edit]

Price stability[edit]

The primary role of central banks is usually to maintain price stability, as defined as a specific level of inflation. Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to a currency. Most central banks currently have an inflation target close to 2%.


Since inflation lowers real wages, Keynesians view inflation as the solution to involuntary unemployment. However, "unanticipated" inflation leads to lender losses as the real interest rate will be lower than expected. Thus, Keynesian monetary policy aims for a steady rate of inflation.


Central banks as monetary authorities in representative states are intertwined through globalized financial markets. As a regulator of one of the most widespread currencies in the global economy, the US Federal Reserve plays an outsized role in the international monetary market. Being the main supplier and rate adjusted for US dollars, the Federal Reserve implements a set of requirements to control inflation and unemployment in the US.[46]

High employment[edit]

Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. Unemployment beyond frictional unemployment is classified as unintended unemployment. For example, structural unemployment is a form of unintended unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Macroeconomic policy generally aims to reduce unintended unemployment.


Keynes labeled any jobs that would be created by a rise in wage-goods (i.e., a decrease in real-wages) as involuntary unemployment:

Monetary policy: by setting the official and controlling the money supply;

interest rate

Financial stability: acting as a government's and as the bankers' bank ("lender of last resort");

banker

Reserve management: managing a country's and gold reserves and government bonds;

foreign-exchange

Banking supervision: regulating and supervising the , and currency exchange;

banking industry

Payments system: managing or supervising means of payments and inter-banking clearing systems;

Coins and notes issuance;

Other functions of central banks may include economic research, statistical collection, supervision of deposit guarantee schemes, advice to government in financial policy.

Institutional independence: The independence of the central bank is enshrined in law and shields central banks from political interference. In general terms, institutional independence means that politicians should refrain from seeking to influence monetary policy decisions, while symmetrically central banks should also avoid influencing government politics.

Goal independence: The central bank has the right to set its own policy goals, whether inflation targeting, control of the money supply, or maintaining a . While this type of independence is more common, many central banks prefer to announce their policy goals in partnership with the appropriate government departments. This increases the transparency of the policy-setting process and thereby increases the credibility of the goals chosen by providing assurance that they will not be changed without notice. In addition, the setting of common goals by the central bank and the government helps to avoid situations where monetary and fiscal policy are in conflict; a policy combination that is clearly sub-optimal.

fixed exchange rate

Functional & operational independence: The central bank has the independence to determine the best way of achieving its policy goals, including the types of instruments used and the timing of their use. To achieve its mandate, the central bank has the authority to run its own operations (appointing staff, setting budgets, and so on.) and to organize its internal structures without excessive involvement of the government. This is the most common form of central bank independence. The granting of independence to the Bank of England in 1997 was, in fact, the granting of operational independence; the inflation target continued to be announced in the Chancellor's annual budget speech to Parliament.

Personal independence: The other forms of independence are not possible unless central bank heads have a high . In practice, this means that governors should hold long mandates (at least longer than the electoral cycle) and a certain degree of legal immunity.[84] One of the most common statistical indicators used in the literature as a proxy for central bank independence is the "turn-over-rate" of central bank governors. If a government is in the habit of appointing and replacing the governor frequently, it clearly has the capacity to micro-manage the central bank through its choice of governors.

security of tenure

Financial independence: central banks have full autonomy on their budget, and some are even prohibited from financing governments. This is meant to remove incentives from politicians to influence central banks.

Legal independence : some central banks have their own legal personality, which allows them to ratify international agreements without the government's approval (like the ), and to go to court.

ECB

Di Bartolomeo, G., and Hughes Hallett, A. [2012], "Central banks and economic policy after the crisis: what have we learned?", ch. 5 in: Baker, H. K. and Riddick, L. A. (eds.), Survey of International Finance, Oxford University Press.

Acocella, N.

List of central bank websites at the Bank for International Settlements

International Journal of Central Banking

– A publication of the U.S. Federal Reserve, describing its role in the macroeconomy

"The Federal Reserve System: Purposes and Functions"

(PDF). Archived (PDF) from the original on 9 October 2022. (176 KB) – C E V Borio, Bank for International Settlements, Basel

A Hundred Ways to Skin a Cat: Comparing Monetary Policy Operating Procedures in the United States, Japan and the Euro Area