3. Role of central banks

What are the 4 key roles of central banks

o implementation of monetary policy

o banker to the government

o banker to the banks - lender of last resort

o role in regulation of the banking industry

Implementation of monetary policy

changing interest rates, the supply of money & credit and exchange rates to influence the economy

Banker to the govt

The govt sets the annual budget but it is the central bank that manages the tax receipts and payments.

Banker to the banks

Commercial banks are able to borrow from the central bank if they run into short-terml liquidity issues.

Regulation of the banking industry

Due to high asymmetric information, the commercial banks are regulated to protect consumers. e.g., managing money supply and promoting stability

Why are interest rate changes by the central banks less efective when the base rate is close to zero

because the traditional mechanism for stimulating the economy breaks down.