A central bank manages a country's money. It sets interest rates, controls the money supply, and acts as a lender of last resort when banks fail. The Federal Reserve in the US, the European Central Bank, and the Bank of Japan are examples. They are not commercial banks. You cannot walk in and open a checking account.

Their goals vary. The Fed has a dual mandate: maximum employment and stable prices. The ECB focuses primarily on inflation. Central banks use tools like open market operations, reserve requirements, and quantitative easing. During crises, they inject liquidity to keep the financial system from freezing.

Independence is a key feature. Politicians often want lower rates before elections. Central bankers are supposed to resist that pressure. The arrangement is imperfect, but countries with independent central banks tend to have lower inflation. Coordination with fiscal policy is tricky and sometimes contentious.

Core functions

• Setting monetary policy
• Issuing currency
• Regulating banks
• Managing payment systems
• Acting as lender of last resort