central bank

Institution, such as the U.S. Federal Reserve System, charged with regulating the size of a nation's money supply, the availability and cost of credit, and the foreign exchange value of its currency (see foreign exchange). Central banks act as the fiscal agent of the government, issuing notes to be used as legal tender, supervising the operations of the commercial banking system, and implementing monetary policy. By increasing or decreasing the supply of money and credit, they affect interest rates, thereby influencing the economy. Modern central banks regulate the money supply by buying and selling assets (e.g., through the purchase or sale of government securities). They may also raise or lower the discount rate to discourage or encourage borrowing by commercial banks. By adjusting the reserve requirement (the minimum cash reserves that banks must hold against their deposit liabilities), central banks contract or expand the money supply. Their aim is to maintain conditions that support a high level of employment and production and stable domestic prices. Central banks also take part in cooperative international currency arrangements designed to help stabilize or regulate the foreign exchange rates of participating countries. Central banks have become varied in authority, autonomy, functions, and instruments of action, but there has been consistent increased emphasis on the interdependence of monetary and other national economic policies, especially fiscal policies and debt management policies. See also bank; investment bank; savings bank.

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