Central bank

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The conduct of monetary policy is usually delegated by a country's government to its central bank. One way of doing so is by varying the interest rate that it charges the banks. A rate reduction encourages banks to borrow money so that they can increase lending and so create money. Another way of increasing the money supply is by quantitative easing in which the central bank buys corporate or government securities from the commercial banks, paying for them by a nominal increase in the reserves that the banks deposit with it (sometimes referred to as "printing money"). The resulting increase in the banks' reserves also enables them to increase their lending and so create more money. Alternatively, the money supply can be increased more directly by reducing the minimum reserve ratios that the banks are legally required to maintain. It is also open to a central bank to sterilise the monetary system against other influences upon the money supply by increasing or reducing its holdings of government securities [1].

Most central banks also act as lender of last resort to their countries' banks, and many of them are also responsible for the regulation of their countries' financial systems.