Central Bank and monetary policy

The Central Bank is the main bank of a country which is usually responsible for the control of the money supply and monetary policy.

Monetary policy involves changing interests and the money supply to target the rate of economic growth and inflation.

Important Central banks include

  • Federal Reserve US
  • ECB European Central Bank – EU
  • Bank of England UK
  • Bank of Japan – Japan
  • Reserve Bank of India – India

Functions of a Central Bank

  • Printing money
  • Acting as banker to the government
  • Selling government debt to the bond markets
  • Setting interest rates (monetary policy) to influence the rate of inflation and economic growth.
  • Using unorthodox monetary policy is certain circumstances, e.g. Quantitative easing.

Central Bank Independence

In some countries government’s take responsibility for Monetary policy. However, recently there has been a trend towards giving Central Banks independence for setting interest rates and controlling monetary policy. For example, the Bank of England was made independent in 1997.

However, government’s often retain some control over monetary policy. For example, the UK government still set the inflation target CPI = 2% +/-1.

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