Editing Central bank (section)

==Central bank operations==
{{See also|Currency board}}

The functions of a central bank may include:

* '''Monetary policy:''' by setting the official [[interest rate]] and controlling the [[money supply]];
*'''Financial stability:''' acting as a government's [[banker]] and as the bankers' bank ("[[lender of last resort]]");
* '''Reserve management:''' managing a country's [[foreign exchange market|foreign-exchange]] and [[gold reserves]] and [[government bond]]s;
* '''Banking supervision:''' regulating and supervising the [[Bank|banking industry]], and currency exchange;
*'''Payments system''': managing or supervising means of payments and inter-banking clearing systems;
*'''Coins and notes issuance;'''
*'''Other functions''' of central banks may include economic research, statistical collection, supervision of deposit guarantee schemes, advice to government in financial policy.

===Monetary policy===
{{Main|Monetary policy}}

Central banks implement a country's chosen [[monetary policy]].

====Currency issuance====
At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a [[fiat currency]], [[gold standard|gold-backed currency]] (disallowed for countries in the [[International Monetary Fund]]), [[currency board]] or a [[currency union]]. When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of [[promissory note]]: "money" under certain circumstances. Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are [[fiat money]], the "promise to pay" consists of the promise to accept that currency to pay for taxes.

A central bank may use another country's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by the [[Bulgarian National Bank]], [[Hong Kong]] and [[Latvia]] (until 2014), the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency.
Similar to commercial banks, central banks hold assets (government bonds, foreign exchange, gold, and other financial assets) and incur liabilities (currency outstanding). Central banks create money by issuing [[banknote]]s and loaning them to the government in exchange for interest-bearing assets such as government bonds. When central banks decide to increase the money supply by an amount which is greater than the amount their national governments decide to borrow, the central banks may purchase private bonds or assets denominated in foreign currencies.

The [[European Central Bank]] remits its interest income to the central banks of the member countries of the European Union. The US [[Federal Reserve]] remits most of its profits to the U.S. Treasury. This income, derived from the power to issue currency, is referred to as [[seigniorage]], and usually belongs to the national government. The state-sanctioned power to create currency is called the [[Right of Issuance]]. Throughout history, there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income.
The expression "monetary policy" may also refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority.

====Monetary policy instruments====

The primary monetary policy tool available to central banks is the administered interest rate paid on qualifying deposits held with them. Adjusting this rate up or down influences the rate commercial banks pay on their own customer deposits, which in turn influences the rate that commercial banks charge customers for loans.

A central bank affects the monetary base through [[open market operations]], if its country has a well developed market for its government bonds. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, repurchase agreements or "repos", company bonds, or foreign currencies, in exchange for money on deposit at the central bank. Those deposits are convertible to currency, so all of these purchases or sales result in more or less base currency entering or leaving market circulation.

If the central bank wishes to decrease interest rates, it reduces its administered rates ([[Bank rate|Bank Rate]], the [[Repurchase agreement|reverse repurchase agreement rate]] and the [[Discount window|discount rate]]). This results in commercial banks bidding down the rate they pay customers on their deposits and, subsequently, loan rates are reduced commensurately. Cheaper credit can increase [[consumer spending]] or business investment, stimulating output growth. On the other hand, cheaper interest income can reduce spending, suppressing output. Additionally, when business loans are more affordable, companies can expand to keep up with consumer demand. They ultimately hire more workers, whose incomes increase, which in its turn also increases the demand. This method is usually enough to stimulate demand and drive economic growth to a higher rate. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of the [[United States]], the [[Federal Reserve]] targets the [[federal funds rate]], the rate at which member banks lend to one another overnight; however, the [[monetary policy of China]] (since 2014) is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies.

A third alternative is to change [[reserve requirements]]. The reserve requirement refers to the proportion of total liabilities that banks must keep on hand overnight, either in its vaults or at the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. Lowering the reserve requirement frees up funds for banks to buy other profitable assets. However, even though this tool immediately increases liquidity, central banks rarely change the reserve requirement because doing so frequently adds uncertainty to banks' planning. Most modern central banks now have zero formal reserve requirement.

==== Unconventional monetary policy ====
Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as '''unconventional monetary policy'''. These include [[Quantitative easing#Credit easing|credit easing]], [[quantitative easing]], [[forward guidance]], and [[Signalling (economics)|signalling]].<ref>{{cite magazine|last1=Roubini|first1=Nouriel|date=January 14, 2016|title=Troubled Global Economy|url=https://time.com/4180698/nouriel-roubini-global-economy/|access-date=5 February 2016|magazine=[[Time (magazine)|Time]]}}</ref> In credit easing, a central bank purchases private sector assets to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for lower interest rates in the future. For example, during the credit crisis of 2008, the [[US Federal Reserve]] indicated rates would be low for an "extended period", and the [[Bank of Canada]] made a "conditional commitment" to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010.

Some have envisaged the use of what Milton Friedman once called "[[helicopter money]]" whereby the central bank would make direct transfers to citizens<ref>{{Cite book|last=Baeriswyl|first=Romain|title=Monetary Policy, Financial Crises, and the Macroeconomy|date=2017|publisher=Springer, Cham|isbn=9783319562605|pages=105–121|language=en|chapter=The Case for the Separation of Money and Credit|doi=10.1007/978-3-319-56261-2_6|s2cid=168667912 }}</ref> in order to lift inflation up to the central bank's intended target. Such policy option could be particularly effective at the zero lower bound.<ref>{{Cite web|title=The Simple Analytics of Helicopter Money: Why It Works – Always – Economics E-Journal|url=http://www.economics-ejournal.org/economics/discussionpapers/2014-24|access-date=2017-11-12|website=www.economics-ejournal.org|language=en|archive-date=13 November 2017|archive-url=https://web.archive.org/web/20171113005504/http://www.economics-ejournal.org/economics/discussionpapers/2014-24|url-status=live}}</ref>

====Central Bank Digital Currencies====

Since 2017, prospect of implementing [[Central Bank Digital Currency]] (CBDC) has been in discussion.<ref>{{cite web|url=https://bankunderground.co.uk/2017/09/13/beyond-blockchain-what-are-the-technology-requirements-for-a-central-bank-digital-currency/|title=Beyond blockchain: what are the technology requirements for a Central Bank Digital Currency?|last=BankUnderground|date=2017-09-13|website=Bank Underground|language=en|access-date=2019-07-10|archive-date=10 July 2019|archive-url=https://web.archive.org/web/20190710203034/https://bankunderground.co.uk/2017/09/13/beyond-blockchain-what-are-the-technology-requirements-for-a-central-bank-digital-currency/|url-status=live}}</ref> As of the end of 2018, at least 15 central banks were considering to implementing CBDC.<ref>{{Cite journal |author=Tommaso Mancini-Griffoli |author2=Maria Soledad Martinez Peria |author3=Itai Agur |author4=Anil Ari |author5=John Kiff |author6=Adina Popescu |author7=Celine Rochon |date=12 November 2018|title=Casting Light on Central Bank Digital Currency|journal=IMF Staff Discussion Note}}</ref> Since 2014, the People's Bank of China has been working on a project for digital currency to make its own digital currency and electronic payment systems.<ref>{{cite web|url=https://www.ft.com/content/e3f9c3c2-0aaf-11ea-bb52-34c8d9dc6d84 |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/e3f9c3c2-0aaf-11ea-bb52-34c8d9dc6d84 |archive-date=10 December 2022 |url-access=subscription |url-status=live|title=What is China's digital currency plan?|date=2019-11-25|website=[[Financial Times]]|language=en-GB|access-date=2019-11-30}}</ref><ref>{{cite news|url=https://www.reuters.com/article/us-cenbank-digital-currencies-explainer-idUSKBN1XG25O|title=Explainer: Central bank digital currencies – edging toward reality?|date=2019-11-06|work=Reuters|access-date=2019-11-30|language=en|archive-date=9 November 2019|archive-url=https://web.archive.org/web/20191109210006/https://www.reuters.com/article/us-cenbank-digital-currencies-explainer-idUSKBN1XG25O|url-status=live}}</ref>

=== Banking supervision and other activities ===
{{Basel II}}

In some countries a central bank, through its subsidiaries, controls and monitors the banking sector. In other countries banking supervision is carried out by a government department such as the [[UK Treasury]], or by an independent government agency, for example, UK's [[Financial Conduct Authority]]. It examines the banks' [[balance sheet]]s and behaviour and policies toward consumers.{{clarify|date=January 2015}} Apart from refinancing, it also provides banks with services such as transfer of funds, bank notes and coins or foreign currency. Thus it is often described as the "bank of banks".

Many countries will monitor and control the banking sector through several different agencies and for different purposes. The [[Bank regulation in the United States]] for example is highly fragmented with 3 federal agencies, the [[Federal Deposit Insurance Corporation]], the [[Federal Reserve Board]], or [[Office of the Comptroller of the Currency]] and numerous others on the state and the private level. There is usually significant cooperation between the agencies. For example, [[money center bank]]s, [[deposit-taking institution]]s, and other types of financial institutions may be subject to different (and occasionally overlapping) regulation. Some types of banking regulation may be delegated to other levels of government, such as state or provincial governments.

Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergers and are wary of concentration in this industry due to the danger of [[groupthink]] and runaway lending bubbles based on a [[single point of failure]], the [[credit culture]] of the few large banks.

=== Public communication ===
Central banks have increasingly engaged in public communication to ensure accountability, build trust, and manage inflation expectations.<ref>{{Cite journal |last1=Blinder |first1=Alan S. |last2=Ehrmann |first2=Michael |last3=de Haan |first3=Jakob |last4=Jansen |first4=David-Jan |date=2024 |title=Central Bank Communication with the General Public: Promise or False Hope? |url=https://www.aeaweb.org/articles?id=10.1257/jel.20231683 |journal=Journal of Economic Literature |language=en |volume=62 |issue=2 |pages=425–457 |doi=10.1257/jel.20231683 |issn=0022-0515|hdl=1871.1/13a48b84-5aed-436c-970f-9b8fcad3fdb4 |hdl-access=free }}</ref> Various aspects of central bank communication are also analyzed, including textual content through text mining techniques,<ref>{{cite journal |last1=Benchimol |first1=Jonathan |last2=Kazinnik |first2=Sophia |last3=Saadon |first3=Yossi |date=2022 |title=Text mining methodologies with R: An application to central bank texts |url=https://scholar.harvard.edu/sites/scholar.harvard.edu/files/jbenchimol/files/text-mining-methodologies.pdf |journal=Machine Learning with Applications |volume=8 |pages=100286 |doi=10.1016/j.mlwa.2022.100286|s2cid=243798160 |doi-access=free }}</ref> facial expressions during press conferences,<ref>{{Cite journal |last1=Curti |first1=Filippo |last2=Kazinnik |first2=Sophia |date=2023 |title=Let's face it: Quantifying the impact of nonverbal communication in FOMC press conferences |journal=Journal of Monetary Economics |volume=139 |pages=110–126 |doi=10.1016/j.jmoneco.2023.06.007}}</ref> vocal characteristics,<ref>{{Cite journal |last1=Gorodnichenko |first1=Yuriy |last2=Pham |first2=Tho |last3=Talavera |first3=Oleksandr |date=2023 |title=The Voice of Monetary Policy |journal=American Economic Review |volume=113 |issue=2 |pages=548–584 |doi=10.1257/aer.20220129|url=https://centaur.reading.ac.uk/109359/1/Manuscript.pdf }}</ref> and the clarity and readability of monetary policy announcements.<ref>{{Cite journal |last1=Benchimol |first1=Jonathan |last2=Caspi |first2=Itamar |last3=Kazinnik |first3=Sophia |date=2023 |title=Measuring Communication Quality of Interest Rate Announcements |journal=The Economists' Voice |volume=20 |issue=1 |pages=43–53 |doi=10.1515/ev-2022-0023}}</ref>