Role of Central Banking
The principal monetary institution in a market economy is the central bank. These are usually government-owned institutions, but even in countries where they are owned by the nation's banks (such as the
Most central banks perform the following functions: They serve as the government's banker, act as the banker of the banking system, regulate the monetary system for both domestic and international policy goals, and issue the nation's currency. As banker to the government, the central bank collects and disburses government income and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the national banking authorities, using a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are usually the responsibility of the central bank.
The ability of the central bank to control the money supply and thus the pace of economic growth is responsible for a major economic-policy debate. Some economists believe that monetary control is extremely effective in the short run and can be used to influence economic activity. Nevertheless, some hold that flexible monetary policy should not be used because, in the long run, central banks have been unable to control the economy effectively. Another group of economists believes that the short-run impact of monetary control is less powerful, but that the central banking authorities can play a useful role in justifying the excesses of inflation and depression. A newer school of economists claims that monetary policy cannot affect systematically the pace of national economic activity. All agree that problems related to the supply side of the economy, such as fuel shortages, cannot be resolved by central-bank action.