What is the purpose of the central banks? (May 2013)

Summary

The transcript discusses the evolution of banknote issuance, highlighting the role of central banks, such as the European Central Bank, in modern monetary systems. It explains how central banks control monetary policy through interest rates and deposit requirements, manage inflation, and oversee commercial banks. The concept of seigniorage, the profit from creating money, is also introduced. In response to economic crises, central banks are employing unconventional methods, such as maintaining low interest rates and purchasing government bonds, to support the economy and ensure liquidity in financial markets.

Takeaways

• 🏦 Central banks are the sole issuers of banknotes in modern economies, a privilege that has been established over the past century.
• 💶 The European Central Bank (ECB) oversees the euro system, which includes national banks of eurozone countries.
• 🔄 Central banks not only circulate banknotes but also have the authority to withdraw and destroy them when necessary.
• 📉 Monetary policy is primarily managed through the adjustment of interest rates on deposits and loans.
• 💰 The key lending rate is the main instrument for central banks to influence money supply and inflation.
• 📈 When central banks lower interest rates, it encourages commercial banks to offer loans at lower rates, stimulating the economy.
• 🔒 In times of high inflation, central banks can increase interest rates and minimum deposit requirements to reduce the money supply.
• 👮 Central banks often supervise commercial banks to maintain overall financial stability within the banking system.
• 💸 Seigniorage is the profit earned by central banks from the difference in interest between loans to banks and deposits.
• 🔍 In response to economic crises, central banks may adopt unconventional measures, including purchasing government bonds and maintaining low interest rates.

Q & A

What is the historical role of commercial banks in issuing bank notes?

In earlier times, many commercial banks issued their own bank notes, but this practice has changed.

What is the current monopoly on bank note issuance?

Currently, the issuance of bank notes is a monopoly held by national banks or central banks.

What is the euro system, and how is it structured?

The euro system consists of national banks from eurozone countries that collaborate with a common central bank, the European Central Bank (ECB).

What are the primary functions of central banks?

Central banks print bank notes, put them into circulation, withdraw and destroy notes, supply giro money, and supervise commercial banks.

How do central banks influence monetary policy?

Central banks influence monetary policy through interest rates on deposits and loans and by setting minimum deposit requirements for commercial banks.

What is the key lending rate, and why is it important?

The key lending rate is the interest charged by the central bank to commercial banks, serving as a main instrument for steering monetary policy.

What actions do central banks take to control money supply?

To increase money supply, central banks can lend money to commercial banks at low interest rates; to reduce it, they can raise the key lending rate and minimum deposit requirements.

What is the legal obligation of central banks regarding inflation?

Most central banks are legally obligated to maintain low inflation.

What is seigniorage, and how do central banks benefit from it?

Seigniorage is the profit made by central banks from money creation, as they lend money to commercial banks at interest while the money itself bears no interest.

What unconventional measures are central banks taking during economic crises?

In crises, central banks are keeping key lending rates low, lending money to commercial banks at low interest, and buying government bonds to support the economy.