Lesson 1 of 8 · 12 min
What central banks do and what they aim for
A central bank issues the country's fiat money and stands behind the banking system, and almost every central bank names one overarching objective for all that work: price stability.
In short
- Modern money is fiat money: not convertible into gold or anything else, but legal tender that must be accepted in payment. Its value rests on trust, so the issuer must guard it.
- Typical roles: monopoly supplier of the currency, banker to the government and the bankers' bank, lender of last resort, regulator and supervisor of the payments system, conductor of monetary policy and supervisor of the banking system.
- Bank supervision is the role central banks are least likely to hold alone: some countries give it to a separate agency or split it among several bodies.
- Most central banks also manage the country's foreign currency and gold reserves.
- Monetary policy means central bank actions aimed at the quantity of money and credit in the economy. Its overarching objective is nearly always price stability, i.e. controlling inflation.
- Tax rates and transfer programmes are fiscal policy, set by the government, not the central bank.
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