Understanding Central Banks

Summary This chapter provides an in-depth look at central banks, the institutions responsible for managing a country's monetary policy, currency supply, and interest rates. Typically independent from government influence, central banks regulate the money supply, ensure price stability, maintain foreign currency reserves, and supervise the banking system. They issue two forms of money: central bank money (or reserves) for financial market participants and physical cash for the public. Central banks generate money through open market operations, reserve requirements, and account for money on their balance sheets. They also engage in quantitative easing to stimulate economic growth in crises. The chapter also explores the legal mandates of central banks, including conducting monetary policy and supervising payment systems. Central banks generate income through seigniorage, interest on reserves, foreign exchange operations, and fees. The chapter concludes by discussing the future strategies of central banks, including the exploration of Central Bank Digital Currencies (CBDCs), which could reshape financial systems globally.