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ECON 424 Central Banking

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Imagine the different roles and responsibilities of modern central banks, including the operation of the payment system, monetary policy, supervision, and financial stability. Discuss different ways of structuring a central bank to best manage its responsibilities.

A central bank is a financial institution that enjoys privileged control over the production and distribution of currency and credit for a country or group of countries. In modern economies, the central bank is usually responsible for developing monetary policy and overseeing member banks.

The central bank is essentially a non-market or even anti-competitive institution. While some have been nationalized, many central banks are not government agencies and are often touted as political independence. However, even if the central bank is not legally owned by the government, its privileges are established and protected by law.

The key feature that distinguishes the central bank from other banks is its legal monopoly, which gives it the privilege of issuing paper money and cash. Private commercial banks are only allowed to issue current liabilities such as check deposits.

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