Central Bank

Lecturer: Leyli Malikova

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A Central Banks is an integral part of
the financial and economic system.
They are usually owned by the
government and given certain functions
to fulfill. These include printing money,
operating monetary policy, the lender
of last resort and ensuring the stability
of financial system.
 • Macroeconomic stability - All central
banks strive for low and stable inflation;
What Is the most also try to promote stable growth in
Mission of a output and employment.
Nation's Central • Financial stability - Central banks try to
Bank?* ensure that the nation's financial system
functions properly; importantly, they try to
prevent or mitigate financial panics or crises.
A central bank is the term used to describe
the authority responsible for policies that
affect a country’s supply of money and
credit. More specifically, a central bank uses
its tools of monetary policy - open market
operations, discount window lending,
changes in reserve requirements-to affect
shortterm interest rates and the monetary
base (currency held by the public plus bank
reserves) in order to achieve important
policy goals
 Deeper definition

Central banks were established as a bulwark against

financial crisis. As the institution that controls a nation’s
monetary policy, central banks have the ability to both boost
and slow the growth of the economy. That’s because central
banks have a reserve of cash that commercial banks can
draw from to give out loans, the cost of which is determined
by national interest rates.
If inflation is increasing, the central bank can raise
interest rates, which makes it more expensive for an
individual to take out a loan from her bank. The central
bank might stop producing money or compel commercial
banks to buy financial instruments like treasury bills or
foreign currency, which reduces the supply of money in an
economy. This is called contfractionary money policy.
 Deeper definition

On the other hand, if the economy is sagging, the central bank

can lower interest rates, giving commercial banks cheaper access
to funds that therefore let individuals and businesses borrow
more. The central bank might start printing money again. This is
called expansionary money policy.
Most central banks set a reserve requirement for commercial
banks, meaning that they must retain a specified percentage in
cash of what they must to account holders, which makes sure
banks don’t run out of money. Countries that don’t set a reserve
requirement, often have capital requirements instead, which are
determined by the ratio of a bank’s capital to its risk.
 HISTORY*

Sweden created the world's first central bank, the

Riksbank, in 1668. The Bank of England came next
in 1694. Napoleon created the Banquet de France in
1800. Congress established the Federal Reserve in
1913. The Bank of Canada began in 1935, and
the German Bundesbank was reestablished after
World War II. In 1998, the European Central Bank
replaced all the eurozone's central banks.
Functions of
Central Bank*
* 1. Issue money. The Central Bank will have responsibility for
issuing notes and coins and ensure people have faith in notes
which are printed, e.g. protect against forgery. Printing money
is also an important responsibility because printing too much
can cause inflation.
2. Lender of Last Resort to Commercial banks. If banks get
into liquidity shortages then the Central Bank is able to lend
the commercial bank sufficient funds to avoid the bank
running short. This is a very important function as it helps
maintain confidence in the banking system. If a bank ran out
of money, people would lose confidence and want to withdraw
their money from the bank. Having a lender of last resort
means that we don’t expect a liquidity crisis with our banks,
therefore people have high confidence in keeping our savings
in banks.
 3. Lender of Last Resort to Government. Government
* borrowing is financed by selling bonds on the open market.
There may be some months where the government fails to
sell sufficient bonds and so has a shortfall. This would cause
panic amongst bond investors and they would be more likely
to sell their government bonds and demand higher interest
rates. However, if the Bank of England intervene and buy
some government bonds then they can avoid these ‘liquidity
shortages’. This gives bond investors more confidence and
helps the government to borrow at lower interest rates. A
problem in the Eurozone in 2011, is that the ECB was not
willing to act as lender of last resort – causing higher bond
yields.
4. Target low inflation. Many governments give the Central
Bank a target for inflation. Low inflation helps to create
greater economic stability and preserves the value of money
and savings.
 5. Target growth and unemployment. As well as low
* inflation a Central Bank will consider other
macroeconomic objectives such as economic growth and
unemployment. For example, in a period of
temporary cost-push inflation, the Central Bank may
accept a higher rate of inflation because it doesn’t want to
push the economy into a recession.
6. Operate monetary policy/interest rates. The Central
Bank set interest rates to target low inflation and maintain
economic growth.  Every month the MPC will meet and
evaluate whether inflationary pressures in the economy
justify a rate increase. To make a judgement on
inflationary pressures they will examine every aspect of
the economic situation and look at a variety of economic
statistics to get a picture of the whole economy. 
* 7. Ensure stability of the financial system. For
example, regulate bank lending and financial
derivatives
8. Unconventional monetary policy. The Central Bank
may also need to use other monetary instruments to
achieve macroeconomic targets. For example, in a
liquidity trap, lower interest rates may be insufficient
to boost spending and economic growth. In this
situation, the Central Bank may resort to more
unconventional monetary policies such
as quantitative easing. This involves creating money
and using this money to buy bonds; the aim of
quantitative easing is to reduce interest rates and
boost bank lending.
 8. Unconventional monetary policy:
Central banks and economic growth
Central banks affect economic growth by controlling
the liquidity in the financial system. They have three monetary
policy tools to achieve this goal.
First, they set a reserve requirement. It's the amount of cash
that member banks must have on hand each night. The central
bank uses it to control how much banks can lend.
Second, they use open market operations to buy and sell
securities from member banks. It changes the amount of cash on
hand without changing the reserve requirement.
Third, they set targets on interest rates they charge their
member banks. That guides rates for loans, mortgages, and
bonds. Raising interest rates slows growth,
preventing inflation. That's known as contractionary monetary
policy. Lowering rates stimulates growth, preventing or shortening
a recession. That's called expansionary monetary policy.
 Reserve Requirements
Central banks often use reserve
requirements to increase and decrease the
supply of money. It does this by requiring
each bank to keep back a certain percent of
each deposit they take in. For instance, most
commercial banks will only keep 5 cents for
each dollar put in, and loan out the other 95
cents.
So if the central bank was to raise the
reserve requirement to 10 percent, then
commercial banks would have to keep 10
cents for each dollar, and only loan out 90
cents. In turn that means few loans going
out, thereby restricting the circulation of
money.
“Profit of Central Bank”*
Difference between the net present value of
monetary income flows (often called seigniorage in
the economic literature) and the net present value
of the cost of running the Central Bank.
Seigniorage is the difference between the value
of money and the cost to produce and distribute it.
Seigniorage can be a convenient source of
revenue for a government. By providing the
government with increased purchasing power at
the expense of public purchasing power, it imposes
what is metaphorically known as an inflation tax
on the public.
 
THE CENTRAL BANK OF THE
REPUBLIC OF AZERBAIJAN*
The National Bank of the Republic of
Azerbaijan was established by Decree
of President of the Republic of
Azerbaijan on Establishment of the
National Bank of the Republic of
Azerbaijan dated 11 February
1992.The National Bank of the Republic
of Azerbaijan was renamed as ‘The
Central Bank of the Republic of
Azerbaijan’ due to entry into legal force
of the Referendum Act of the Republic
of Azerbaijan dated 18 March 2009 on
‘Making additions and amendments
to the Constitution of the Republic of
Azerbaijan’.
 
 RELATIONS OF THE CENTRAL BANK WITH PUBLIC AUTHORITIES
The Central Bank is independent in discharge of its responsibilities and
exercise of its authorities prescribed by the Constitution and laws of the
Republic of Azerbaijan, and no public authority or self-administration body,
individuals or legal entities may directly or indirectly for whatever reason
contain, illegally influence or interfere with its activities.
 Although the Central Bank is independent under the legislation, it
coordinates its activities with other public authorities and institutions. At the
same time, the Central Bank participates in discussions on various
directions of the country’s economic policy and issues relevant proposals.
As a state bank the Central Bank services and maintains debit-credit
operations on state treasury accounts. The Central Bank may issue loans
to the government in case of short-term shortfall of funds in the state
budget by purchasing debt securities issued by the Azerbaijani
Government.
So, What Is a • A central bank is not an ordinary
commercial bank, but a government
Central Bank?
agency.
• Central banks stand at the center of a
nation's financial system.
• Central banks have played a key role in
the development of the modern
monetary system.
• All countries have a central bank.
THANK YOU