- CFA Exams
- 2024 Level I
- Topic 2. Economics
- Learning Module 4. Monetary Policy
- Subject 1. Role of Central Banks
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Subject 1. Role of Central Banks PDF Download
The Functions of Money
Money performs three basic functions.
The Roles of Central Banks
Central banks all have similar roles:
- Issue currency
- The government's bank, and bank of the banks
- Lender of last resort to the banking sector
- Regulator and supervisor of the payments system
- Set monetary policy
- Regulate banking system
A nation's monetary policy objectives and the framework for setting and achieving those objectives stems from the relationship between the central bank and the government. Central banks in different countries have a variety of objectives, such as maximum employment, stable prices, and moderate long-term interest rates. In the long run, these objectives are in harmony and reinforce each other, but in the short run, they might be in conflict.
The key objective is price stability. It is the source of maximum employment and moderate long-term interest rates.
User Contributed Comments 4
User | Comment |
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oneashok | Central bank is the lender of last resort to bankers... Is this the conventional function of Central Bank??? |
CFAToad | Oneashok, this may answer your question. The central bank serves to ensure deposits are secured against shocks in the system. Without a lender of last resort, deposits would require greater interest rates, leading to less market liquidity and fewer financial services. Remember banks first and primary function is to take deposits and issue loans. If the deposit risk raises the cost of the bank to take a deposit, then the loan would require a higher rate as well. And this would apply to all banking services. This is traditionally a function of a central bank. So yes to your question. |
LCMilkbone | great in depth summary. |
sshetty2 | surprised no mention of FDIC here |
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