What is the primary role of central banks in an economy?

The primary role of central banks in an economy is to manage monetary policy and regulate the banking system. This involves a variety of functions that are crucial for ensuring financial stability and promoting economic growth. Central banks control the money supply and interest rates, which influences inflation and overall economic activity. By adjusting these factors, they can help stabilize the economy during fluctuations, such as recessions or periods of high inflation.

Additionally, central banks oversee and regulate commercial banks to ensure the soundness of the financial system. This includes monitoring their liquidity, managing risks, and providing emergency support in times of crisis. Through these mechanisms, central banks serve as a lender of last resort, helping to maintain confidence in the banking system.

This role is distinct from other functions that could be ascribed to institutions or entities outside the central bank's mandate. For example, providing loans specifically to businesses is typically the role of commercial banks, not the central bank. Setting prices for goods and services is influenced by market forces rather than central bank policies, and while central banks may support financial conditions conducive to investment, investing directly in public infrastructure projects is generally the responsibility of government entities or private sector firms.