Main institutions of macroeconomics: Central banks

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Main institutions of macroeconomics

Central banks

‘Central banks’ are national institutions which are crucial in designing and implementing monetary policies. Monetary policies include controlling the money supply and setting interest rates. The most significant feature of central banks is their privileged status to issue currency. The monetary policies are crucial to maintain price stability (the value of a currency) which has overarching effects on employment and economic growth.

The second function of central banks is regulating the banking system in a country. Central banks maintain their power over other banks by setting capital and reserve requirements.

Finally, central banks are considered an emergency lender. This makes them a last resort for banks, other institutions, or governments to receive credit.

In the case of a common currency adopted in multiple countries of a region, a regional central bank can take on the task of national central banks. For example, European Central Bank is the central bank of 19 countries which use the Euro as their currency. The Central Bank of West African States (BCEAO) is another example of a regional central bank. It assumes a central role in the monetary policy of its members and issues currency.

The COVID-19 pandemic reveals the importance and role of central banks in alleviating crises. The first response of global central banks has been to cut interest rates to save the collapsing financial markets. Central banks have been implementing policies similar to those during the 2008 global financial crisis. The low interest rates provide cheap borrowing, but they cannot save the economy without eliminating health and safety concerns of people. Thus, the central banks and governments should prioritise public health by creating fiscal resources to support the health system. However, this has not been the case. Once again, the policies of central banks benefit the rich and not the majority.

Monetary policies implemented by central banks (national or regional) often have gendered outcomes. For example, central banks generally aim to maintain low inflation rates. However, research on the impact of inflation reduction on employment reveals that inflation reduction in the Global South disproportionately affects women’s employment. In other words, women are more likely to lose their jobs if inflation reduction leads to a loss of formal employment.1Braunstein, E., & Heintz, J. (2008). Gender Bias and Central Bank Policy: Employment and Inflation Reduction. International Review of Applied Economics 22(2), 173–186.

The reasons for different gendered outcomes include segregation in the labour market (such as the concentration of women in specific sectors) or gender employment discrimination (employees or applicants being treated less favourably because of their sex or gender). The same policies may not create the same outcomes in the high-income countries where women’s employment concentrates in administrative, public, and service jobs (as opposed to agriculture or manufacturing) which are more secure and thus not sensitive to monetary policies.2Takhtamanova, Y., & Sierminska, E. (2009). Gender, Monetary Policy, and Employment: The Case of Nine OECD Countries. Feminist Economics 15(3), 323–353.

All in all, the policies of central banks can create different outcomes based on gender and class, as well as country-specific differences. Thus, central banks should take these issues into account and design their policies with a concern for and aim of achieving gender equality.

Left ArrowMain institutions of macroeconomics: Development banks Purple Dot ExercisesRight Arrow


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