Central Banks

Central Banks as Substate Actors: Theory

An updated review of existing central banks shows a greater variance than is assumed in the dominant rational expectations theories framing the universalistic prescriptions and the role models recommended over the past 30 years. Influence is noticeable, however, in two global trends: (1) in terms of goals, the convergence toward the primacy of price stability, and (2) in terms of the mandated use of monetary resources, the dramatic increase in the number of institutions that acquired statutory independence vis-à-vis governments. Yet the actual variance in the practices and mandates of those institutions across countries and regions limits the scope for generalization. Moreover, central bank functions and powers have been recast over time since the establishment of the first institutions of this breed in the mid-19th century.

A central bank's status as a public, nonprofit institution is the outcome of an evolutionary process, based on the rules and social institutions that underpin its three core functions: (1) as banker to the government, (2) its monopoly of note issuance, and (3) as banker to the banking system—including that of last-resort lender. These functions refer to the unique relationships between the institution and its principal clients: the government and the profit-maximizing financial institutions, mainly commercial banks.