Central bank

The central bank of a State is an institution charged by a country (or a whole of country in the case of a monetary Area like the Euro area) with supervising:

  • the creation of Currency by the Banking system,
  • the Monetary policy,
  • and also the good performance of the Bank S on the level of their solvency and of the observance of the regulations.

This institution can be independent of the political power, completely like the European Central bank ( ECB ), or almost completely, like the Federal fund of the United States ( EDF ).

Concerning the monetary policy, it is a question in the majority of the cases of the fight against the Inflation in order to guarantee the value of the currency (it is thus the statutory objective of the ECB). Sometimes, the central bank set a level of inflation not to be exceeded (for example 2% for the ECB): for that, it has several instruments enabling him to vary the money Supply in circulation in the country and the credit charges granted to the private individuals and companies.

The principal instrument is the fixing of the directing Taux S. These rates determine the cost for the trade banks to be refinanced near the central bank.

Actions of the central banks

August 1st

The central banks implement the Monetary policy by means of various elements:

Incidences of a Central bank on the economy

The interest rate of the market of refinancing from day to day of the trade banks is directed by Central Bank. From where its name of directing rate.

When interest rate drops, the economic agents borrow more to buy, which causes a rise of the request and thus an upward trend of the prices. Conversely, when interest rate goes up, the economic agents borrow less, therefore buy less, and there exists a downward trend of the prices.

The modification of the directing rate is the principal means of a Central Bank to act on the economy. The traditional diagram representing the law of supply and demand teaches that when the request increases, the prices go up, and when the demand falls, the prices drop. It is on this simple diagram that the action of Central Bank is based.

Central Bank uses this macro-economic observation so that the currency preserves a stable value, a " to be able of achat" stable. This purchasing power is evaluated by a price index. Thus, when the prices go up or are likely to go up, Central Bank increases interest rate. That tends to reduce the volume of the credit, therefore the request for products and services, which slows down this rise of the prices. Conversely, when the prices tend to drop, Central Bank lowers interest rate, which increases the request, which tends to a rise of the prices.

Credibility of a central bank

Inflation is concretely given by the behavior of agents (choice of the selling prices by the companies, behavior of purchase and saving of the households, financial markets, etc). These agents determine their behavior according to their anticipations of future inflation. Consequently, it is essential for the central bank which these agents believe in its capacity to reach its objectives of inflation so that those are carried out. The credibility of a central bank spends years, sometimes decades, before being obtained. It is based on the belief of the economic agents that the central bank will be able to face the economic shocks with a suitable monetary policy.

Central large banks of the world

Free zone:

The central banks are gathered within the Banque of the international payments (BIS) (in English (A), Bank for International Settlements ) which is “the central bank of the central banks” and which is, in particular, at the origin of the Accords of Basle.

Related articles

External bonds

  • “the concept of central bank”, study of the Banque de France, 1999.
  • Seigniorage Lists banks (language of the respective country)

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