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date: 20 January 2020

Abstract and Keywords

This chapter describes the emergence of central banks and the evolution of their functions as responses to the monetary and financial crises of the nineteenth and the twentieth centuries. First, central banks have become bankers’ banks to facilitate the settlement of inter-bank payments. Central bank money is the legal tender of all debts, including bank-issued debts that are used as means of payment by non-financial agents. Second, the repetition of liquidity crises has led central banks to regulate and supervise the banking system. These policies aim to prevent excessive risk-taking by one bank threatening the integrity of the payment system. However, because crises cannot always be avoided, central banks stand ready to lend as a last resort if need be. Finally, central banks conduct monetary policy, that is, they supply money to stabilize the unit of account and thereby provide a nominal anchor to the economy.

Keywords: central banks, money, payment systems, lender of last resort, monetary policy

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