Central Bank - What is it? characteristics, functions, instruments, and more

central bank

The autonomous entity that is in charge of administering, regulating, and issuing the legal currency of a nation.

What is the Central Bank?

The Central Bank is the autonomous entity that is responsible for managing, regulating, and issuing the legal currency of a given nation, controlling interest rates, exchange rates, and the country's monetary system.

The main objective of the Central Bank is to ensure the balance of the value of the currency by regulating financial policy, in order to avoid possible inflation in the country.

In addition, it can also provide banking services to commercial banks and even the government, such as money loans; however, it does not offer its activities to individual citizens or entities.

Characteristics of the Central Bank

The main characteristics of the Central Bank are the following:

• Performs bank functions to commercial banks.
• Its decisions do not depend directly on the government but are made by its leaders.
• It is the entity in charge of regulating monetary policy(interest, amount of money in circulation).
• Regulates the stability of the financial system.
• It administers the legal currency of a nation.
• It exercises the functions of a bank to the State.
• Manages the reserves of a country, such as special drawing rights (international currency whose purpose is to save debts acquired with the international fund or between the same central banks), gold, or convertible currencies.

Central bank functions

The main functions of the Central Bank are the following:

• Manage the monetary policy of the country.
• Issue legal tender.
• Protect and manage the nation's reserves.
• Provide banking services to commercial banks and even the government.
• Guarantee the proper functioning of the financial system.

Central Bank Instruments

The Central Bank uses monetary policy as a tool to improve the regulation of wealth and balance inflation rates, through the following instruments:

• Interest rates: minimum price imposed on loans and financial entities through OMA (Open Market Operations). These are used to intervene in the amount of money circulating in the economy.
• Exchange rate: the relationship between the price of one country's currency and another. It is determined by the supply and demand of each of these in the foreign exchange market.
• Money supply: corresponds to the money that is circulating in the hands of the public, as well as bank deposits deposited in financial institutions. That is, the money supply is the amount of money circulating in the economy.
• Legal reserve: it is the percentage of money in the form of a deposit destined to the obligatory reserve by the Central Bank.

Examples of Central Bank

The following are some examples of central banks:

• Federal Reserve System. (United States).
• Bank of the Republic. (Colombia).
• European Central Bank. (ECB).
• Reserve Bank of India. (RBI).
• Central Bank of the Argentine Republic.
• Central Bank of Chile.
• Central Bank of Brazil.
• Central Reserve Bank of Peru.

 

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