A central bank is a financial institution that is responsible for regulating and overseeing a

country's monetary system. Its primary functions include managing the country's money
supply, setting interest rates, controlling inflation, and providing financial services to the
government (Froyen, 2009). Central banks also act as lenders of last resort to commercial
banks during times of financial crisis. Examples of central banks include the Federal Reserve
in the United States, the European Central Bank in Europe, and bank of Tanzania in Tanzania.
Central banks play a critical role in maintaining the stability and health of a country's
economy. Their actions can have significant impacts on financial markets, businesses, and
households, making them a key player in the global economy.
A central bank performs various functions to ensure the stability and effectiveness of a
country's monetary and financial system. Here are five important functions typically carried
out by a central bank:
Monetary Policy Formulation and Implementation
A central bank is responsible for formulating and implementing monetary policy. It controls
the money supply, interest rates, and credit conditions to achieve the desired economic
objectives, such as price stability, low inflation, and sustainable economic growth. Through
tools like open market operations, reserve requirements, and lending rates, the central bank
influences the availability of money and credit in the economy (Gordon, 2007).
Currency Issuance and Management
Central banks have the authority to issue and manage a country's currency. They ensure the
supply of adequate amounts of physical currency, maintain its integrity, and safeguard against
counterfeiting. Central banks also manage the foreign exchange reserves of the country,
which involve trading currencies in the foreign exchange market to stabilize exchange rates
and support the economy's external sector (Gordon, 2007).
Banker to the Government
Central banks often act as bankers to the government, handling their financial transactions
and managing their accounts. They provide services like maintaining government deposits,
managing public debt, issuing government securities, and conducting auctions of these
securities. Central banks also play a role in coordinating fiscal and monetary policies to
ensure overall economic stability (Walsh, 2017).
Financial System Stability and Regulation
Central banks are responsible for promoting and maintaining the stability of the financial
system. They supervise and regulate banks and other financial institutions to ensure their
safety, soundness, and compliance with regulations. Central banks establish prudential
standards, monitor risks in the banking sector, and may intervene or provide liquidity during
times of financial crises to prevent systemic disruptions (Walsh, 2017).
Lender of Last Resort
Central banks serve as lenders of last resort to commercial banks and other financial
institutions in times of liquidity shortages. They provide emergency liquidity assistance to
solvent but illiquid banks to prevent widespread panic and potential bank runs. By acting as a
lender of last resort, central banks help maintain the stability of the banking system and
ensure the smooth functioning of financial markets (Froyen, 2009).
Conclusion; the functions of central banks can vary to some extent depending on the country
and its specific legal and institutional frameworks.

REFERENCES
Froyen, R. (2009). Macroeconomics: Theories and Policies (9th ed.). Pearson Education.
Gordon, R. (2007). Macroeconomis. Boston: Pearson Education Inc.
Walsh, E. (2017). Monetary Theory and Policy (4th ed.). Edinburgh: The MIT press.