Central Bank: functions, role, significance

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

The most important link in the banking system and its management in any country is the central bank. The functions of this institution are diverse and quite interesting, because the issues it deals with lie in various spheres of the economic life of the state. Its main task is to ensure the stability of the national currency within the country and maintain its exchange rate in the external market.

In most cases, the financial body is not directly subordinate to the state. Often formally the owner of the bank's property is some state body, but usually the shareholders are private individuals. The main functions of the country's central bank are extremely important and are the same for almost all states:

firstly, the Central Bank is the issuer of banknotes operating in the country, that is, roughly speaking, it prints money;
secondly, it acts as a "bank of banks", serves the needs of commercial financial institutions and monitors the stability of the system as a whole, taking on the required reserves;
thirdly, it serves as a conductor of the state's monetary policy, in connection with which it is engaged in the implementation of a number of actions.

So that's basically what any central bank does. The functions that it performs in connection with the conduct of monetary policy are also noteworthy and interesting, they echo its relationship with commercial banks.

The Central Bank controls inflation and the exchange rate of the national currency, and it does this with the help of three financial instruments:

Money supply management. Too much money reduces the demand for it and reduces its value. As a result, the currency on the foreign market becomes cheaper, and inflation accelerates. A crude tool that seriously affects the processes in a market economy.
Managing the base interest rate and required reserves. By decreasing and increasing these two indicators, the Central Bank also controls the "price" of money and regulates the operation of the banking system, through it influencing supply and demand in the money and commodity markets.

Currency interventions. The most commonly used instrument, which has a rather insignificant effect on inflation, but helps to control the exchange rate of the national currency. By buying or selling a reserve or national currency on open markets, the Central Bank can influence its mass in the economy and, accordingly, its price. In addition, he may be engaged in the purchase and sale of government-issued securities.

The central bank, whose functions, depending onfrom the country may be narrower or wider, of course, is an indispensable body in the financial and credit system of the state. In addition to ordinary banks, it lends to the state by borrowing domestically and selling government bonds issued by the Ministry of Finance or a similar body. The functions of the Central Bank of Russia, and probably also of other countries, do not end there. Most Central Banks are also involved in the collection and publication of statistical information related to macroeconomic indicators, the establishment of official currency quotes and other additional tasks.

In the economic system of any country, it is difficult to find a body that deals with the same important things as the central bank. The functions that it performs and the tasks it solves are so important that without them, perhaps, in a market economy, the state simply cannot exist.