The Role of Central Banks

The Role of Central Banks

Each country has a central bank responsible for the policies that affect the value of its currency on world markets. The central bank in the United States is actually the Federal Reserve System (the Fed), a system of twelve banks, each representing a region of the United States. The New York Federal Reserve Bank handles the system's intervention in the foreign-exchange markets. Intervention policies are determined by the Federal Open Market Committee. However, the Fed does not act independently of the rest of government; in particular, the Secretary of the Treasury is legally responsible for stabilizing the exchange value of the dollar.7
In spite of the unique nature of the central bank system in each country there is some semblance of international cooperation through the Bank for International Settlement (BIS) in Basel, Switzerland. One of the functions of the BIS is to act as a central banker's bank. It gets involved in swaps and other currency transactions between central banks in the major industrial countries. In addition, central bankers can gather there to discuss monetary cooperation. As mentioned earlier in the chapter, the European Community has been discussing establishing one exchange rate in Europe to replace individual national currencies, but that would require a central bank in Europe to help establish monetary policy and intervene in currency markets.

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