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What Is a Central Bank?

A central bank is a government institution that is tasked with regulating a country’s money supply, issuing the country’s currency, and controlling the country’s interest rates. The central bank can be called different names, such as, reserve bank and monetary authority. The central bank also oversees the operations of the commercial banks doing business in the country. In some cases, the central bank may be under strict rules and regulations which disallow extensive interference from the government and its political parties.

The main role that a central bank plays is to set up and implement a country’s monetary policy. The monetary policy of a country determines the form of currency to be used. Different forms of currency are: fiat currency, gold-backed currency, currency board, or a currency union. A country’s monetary policy aims to attain price stability, high employment, economic growth, interest rate stability, among other things.

Another role that a central bank plays is creating the actual currency - the bills and the coins - that is issued. The central bank is the only entity authorized to create and issue the currency; that is, it has the monopoly over this task.

In extreme cases, the central bank also serves as a lender to other banks in the country. It has been dubbed the “lender’s lender” as a last option in times of crisis.

Examples of central banks include the Federal Reserve in the United States, the European Central Bank in Europe (specifically for the Eurozone), the Bank of England in the United Kingdom, and the Bank of Japan.

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