The Functions of a Central Bank-
The main function of a central bank is, in short, to manage a nation's currency. This is achieved by setting monetary policy.
A central bank is responsible for controlling money supply and setting interest rates and reserve requirements, being responsible for regulating a nation's monetary base and controlling the amount of money in circulation and in print. Central banks usually operate apolitically, and are endowed with powers to supervise a county's financial sector and prevent unscrupulous or fradulent activity being committed by private banks and financial institutions.
The term 'central bank' is a general one, that applies to the role of most state-owned financial entities (such as the Bank of England, the European Central Bank, or the U.S. Federal Reserve System) however some countries have state-owned banks who's functions also include peripheral objectives such as financing imports/exports or may even include goals such as industrial development or national employment.
Monetary Policy-
Monetary policy is the term applied to the means by which a central bank controls the supply of money and manipulates the rate of interest to encourage economic stability and growth, usually targeting specific goals such as low unemployment and stability in prices. Monetary policy is usually described as being either expansionary or contractionary. An expansionary policy sets out to lower interest rates and increase the supply of money, which results in credit being more readily available in the hope that businesses will be encouraged to expand, and therefor recruit. This, in turn, should have a positive effect on employment levels.
A contractionary policy would be used to slow inflation down, with possible targets being the preservation of asset values in an economy.
Other Central Bank Functions-
As well as setting monetary policy, a central bank concerns itself with other important functions.
Encouraging and maintaining financial stability is high on a central bank's objective list, and there has been an especially keen focus and expansion on this remit in recent years, with the global financial crisis throwing many of the world's largest economies into a period of unprecedented turbulence.
A central bank also includes managing a country's reserves as one of it's responsibilities, essentially holding different currencies in its coffers to act as a buffer incase of currency fluctuation.
The Central bank also acts as a lender of last resort to the government, this means the central bank has the capacity to provide financial assistance to the government in times of difficulty. This is a role that almost all Central Bank's fulfill, with a notable exception being the European Central Bank.
Some central bank's also act as an overseer of financial market infrastructure, often having a hand in overseeing private companies that may have significant impact on a country's economy, such as a stock exchange.
