Central Banks

So glad we've almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

Central banks are government-affiliated institutions that manage 'monetary policy' for single countries or groups of countries. Monetary policy involves the fixing or controlling of interest rates, money supply, exchange rates, and/or asset prices, among other things--ostensibly to achieve high-level goals related to economic activity, price stability, trade, or degree of employment.

All countries in the world operate their own central bank, or ride the coat tails of someone else's central bank authority, to enact their monetary policy. Some of the more influential central banks include the Federal Reserve (United States), Bank of Japan (BOJ), European Central Bank (ECB, European Union), and People's Bank of China (PBOC).

Because central banks manipulate key variables that influence economies and markets, such as prices, interest rates, and money supply, they exert tremendous influence on market behavior. Whether one agrees with the tenets of central banking or not, investors must respect the power of these institutions--lest they risk getting their heads handed to them.

In future posts we'll discuss issues related to central banking--particularly as they relate to our home-base central bank, the Federal Reserve.