The Central Bank’s Relationship With the Economy

The Central Bank’s Relationship With the Economy

The central bank has two very important functions within the economic system of a country. The first is to preserve the value of the currency and maintain price stability, its primary tool for this purpose is the management of interest rates. When using the gold standard, the value of banknotes issued by central banks was expressed in terms of gold content, or possibly someone else, the bank tried to maintain certain levels over time.

The second is to maintain financial system stability, since the central bank is the bank of banks, their clients are not ordinary people or specific companies, but the State and existing banks within the territory of the nation to which it belongs. The central bank takes deposits from its customers and keeps them in accounts which they have in him. With these transactions for clients’ accounts with other banks through the payment and clearing systems (SNCF, TARGET2), as an individual in a commercial bank account used for transactions with another individual. In turn, the central bank also provides loans to banks with liquidity problems, or to other states.

Normally, in circumstances of war, governments in a country solve their financial needs with its own central bank.

Central banks are in

* Custodians and administrators of the gold and currency reserves;

* Providers of legal tender;

* Perpetrators of exchange rate policies;

* Responsible for monetary and price stability;

* Service treasury services and financial agents of the Public Debt of national governments;

* Advisors to the Government, reports or studies findings.

* Auditors of conduct and publish statistics related to their functions;

* Lender of last resort (banks banks);

* Promoters of the proper functioning of financial system stability and payments systems;

* Supervisors of the solvency and compliance with current regulations of credit institutions, other entities or financial markets whose supervision is under his tutelage.

All these features and functions lead to central banks have a large influence on the economic policy of countries and which are a key element in the functioning of the economy. These control the monetary system, ie the money circulating in the economy, while avoiding adverse effects to occur as high levels of inflation or unemployment, the credit system through the regulation of interest rates that banks offer or charge their clients and the bank reserve that require banks and other financial institutions and exchange rate system, controlling the local currency’s value against foreign currencies.