….Another topic that is often misunderstood is the role of the central banks. What are they, who operates them, how do they operate and do they actually create money, or tax credits?
They are the scorekeeper for the currency and the government’s fiscal agent. They have a spreadsheet, and they put in debits and they open accounts for the member banks and for foreign governments. When the government spends, they put credit into the appropriate account. When it taxes, they debit the appropriate account. They also regulate and supervise the banking system to some degree.
They’ve also been given the job of determining the appropriate interest rate. There’s no such thing as the market determining rates. In a floating exchange rate, the natural rate of interest is zero, and it’s up to the government, if it wants to support a higher rate, to take action to do that. That comes in the form of either paying interest on balances at the central bank, interest on reserves or selling treasury securities, which are just interest-bearing accounts at the central bank…..
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