Central Banking: Theory and Practice in Sustaining Monetary and Financial Stability

Chapter 3Modern Central Banking Roles and FunctionsWhat Exactly Is a Central Bank?

Learning Objectives

1. Describe various roles and functions of modern central banks.
2. Describe the money creation process.
3. Explain the use of monetary policy to regulate monetary conditions in the economy.
4. Explain the role of central banks in payment systems oversight and provision.
5. Explain the role of central banks as lenders of last resort.
6. Explain the role of central banks as bank supervisors.

In Chapters 1 and 2, we briefly reviewed the evolution of central banking functions over the centuries and the background on international monetary systems so we could understand the context in which central banks have become what they are today. In this chapter we will review the main functions of modern-day central banks. As discussed in Chapter 1, modern central banks do have both commonalities and diversity, and thus their functions and details of institutional designs do differ. The review presented here is thus at an overview level, where broad rationales and mechanics of the functions are discussed, so the reader can see a broader picture of how a modern central bank might look.

This chapter starts with an overview of modern central banking. We then review five key functions of modern central banks: (1) money issuance, (2) the conduct of monetary policy, (3) payment systems regulation and provision, (4) lender of last resort, and (5) banking supervision. When reviewing each of these functions, the ...