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central bank

A central bank is a government-sponsored entity entrusted with the issuance and management of a country’s currency. In the case of the Eurozone, the central bank is a pluri-national entity.

Because they have a monopoly on the issuance of banks and notes, central banks can exercise a decisive influence on short-term money market interest rates—and, by extension, on foreign exchange rates.

The credibility of a central bank depends not only on the technical expertise of its management but also, crucially, on whether it has operational independence from the government.

An important feature of central banks in recent years is the (somewhat informal) network of mutual currency swap agreements that allow participants to draw on a credit line from another central bank in a different currency than its own.

These networks play an important role in stabilising global FX markets in times of heightened currency volatility. Currency swap agreements are mostly centered around the United States’s Federal Reserve Bank and the European Central Banks, but they also involve —increasingly— the People’s Republic Bank of China.