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Money Minders: Central Banks and their roles in an economy

Geoff Riley

8th March 2023

Here is a video of a talk given by Professor Jagjit Chadha to the Marshall Economics Society at Cambridge in March 2023. It covers the roles central banks play in the world today and how they control the macroeconomy. Useful as enrichment and extension for those studying central banks as part of the financial economics element of the A-Level and IB Economics courses.

Money Minders: Central Banks and their roles in an economy

Central banks play a crucial role in the economy by implementing monetary policies that influence interest rates, money supply, and inflation. The primary roles of central banks in an economy include:

  1. Monetary policy: Central banks use monetary policy tools to regulate the money supply and influence interest rates in the economy. This can be done by adjusting the reserve requirements of banks, changing the discount rate at which banks can borrow from the central bank, or buying or selling government securities in open market operations. The aim of these policies is to promote price stability, economic growth, and full employment.
  2. Banking supervision: Central banks are responsible for regulating and supervising banks to ensure the safety and soundness of the financial system. They oversee the operations of banks, monitor their capital adequacy, and intervene if necessary to prevent bank failures or systemic risks.
  3. Currency management: Central banks issue and manage the currency in circulation in the economy, and are responsible for maintaining the stability of the currency's value. They also manage the country's foreign exchange reserves and intervene in the foreign exchange market to stabilize the exchange rate.
  4. Lender of last resort: Central banks act as the lender of last resort to provide liquidity to banks and financial institutions in times of financial distress or crisis. They provide emergency loans or credit to banks to prevent liquidity shortages and to maintain stability in the financial system.
  5. Economic research and analysis: Central banks conduct research and analysis on economic and financial conditions to inform policy decisions. They also provide economic forecasts, publish reports on economic and financial trends, and monitor global economic developments that could affect the country's economy.

Overall, the central bank plays a critical role in maintaining the stability and soundness of the financial system, promoting economic growth, and ensuring price stability.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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