These days ,Central banks are on the market attention because of the way their reaction to the current issues of food prices increases, and the sub prime housing markets crisis, will impact the global economy.-
First of all it is important to say that Central Banks are in charge of monetary policy to keep control of inflation, aimed at the goal of getting price stability, which means they set interest rate(fund available for customers), discount rates (funds available for banks).To decide interest rate level, Central banks follows the “Taylor Rule”. This rule means that as long as effective inflation deviates either upwards or downwards, from a target value, interest rate might go up or down respectively . It goes up when inflation is above target ,and it goes down when it below target. The uses of this rule has decreased the volatility of inflation ,so it has decreased the volatility of GDP which reduces efficiency and welfares losses.
On the financial side of the economy ,Central Banks can carry out open markets operations, which means to sell and buy financial instrument. .Besides, Central Banks are the lender of last resort ,which means that they are the one which banks expect help from when there is a credit crunch and they might transitory run out of cash. Then ,a key second role for Central Banks ,is to keep stability on the financial sector , which means to keep the payment chain in motion and Banking sector liquidity .On this task ,there is no rule except that one arising from avoiding the risks of economic depression ,and a proper judgment of the macroeconomics conditions that financial institution are facing at some moment in time. For instance ,the current global volatility due to the housing sub prime market crisis in the USA, required Central Banks to support financial institutions ,which otherwise were close to run out of cash , which would have a subsequent impact on markets expectations about macroeconomic performance.. While it has been on the financial side, Central Banks have been able to cope with the requirements of a markets with higher risk aversion than before. What if it goes beyond the financial side of the economy? .-
Central banks also needs some complementary policies to get a better results and impact coming out from its decisions. On the aggregate macroeconomics side, fiscal policy should be closely coordinated with monetary policy.
Price stability and financial stability ,are the key contribution Central Banks can make to foster economic growth .Therefore, economic growth is not out of Central Banks ´s concern. In fact it is its third, although less visible, main concern. There is no sustainable economic growth with high inflation and financial instability . Some Central banks have this goal very explicit on their responsibility list, whereas others includes this concern in a less explicit format. Either way, there is no Central Bank chairman who is not aware of the implications for economic growth ,arising because inflation might be above target. On the other hand, the uses of rules have made Central Banks more reliable and credible because that means less volatility ,and future conditions are better predictable .
Because of its Importance and influence most of Central banks are independent .The degree of independency varies among different countries .-