Why do we have central banks? We argue that, in its most basic form, the main purpose of having an independent institution in charge of monetary policy is to smooth out the inevitable ups and downs of business cycles so that a society and its people can achieve their full growth potential without the adverse effects of wild economic fluctuations. Looking at U.S. data going back 164 years, we do observe a significant and gradual reduction in the vagaries of the economy after the creation of the Federal Open Market Committee (FOMC) in 1935.
How do central banks manage to achieve their ‘why?’ While there are some nuances from country to country, the ‘how’ of all modern-day major central banks evolves around ensuring stability in prices (inflation) through the use of monetary policy.
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