History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours. — Saifedean Ammous
A Central Bank is a 'printer press' controlled by a state (e.g. the FED) or by a group of states (e.g. the European Central Bank) which is given exclusive control over the production of a fiat currency and over its allocation. The plan to spend the new monetary units is called monetary policy. and to whom and under which conditions will be given what will be acquired .
The consequence is the erosion of the represented value got creating value for society
Its main function is to create value out of thin air that is used to finance expenses
It uses those powers to achieve its mandates of short-term monetary stability and short-term financial stability by its own plan that is called monetary policy (the FED has also the mandate of achieving maximum employment).
Modern Central Banks usually consider monetary stability as a not very high domestic consumer price inflation and a stable exchange rate against the main other fiat currencies.
Financial stability is considered the smoothly run of the financial system.
Modern convencional monetary policy implementation process:
1st. Announcement of interest rate policy: the Central Bank makes public its target figure for the interest rate that commercial banks charge each other overnight when lending reserve balances (Federal funds rate, LIBOR, etc.). Speculators will tend to led rates to that figure knowing that if not, the Central Bank can always step in through open market operations.
2nd. Open market operations: the Central Bank creates money and uses it to purchase government securities in the Money Market (the market for short-term debt), which influences overnight interest rate. There are outright transactions and repo transactions.
3rd. Standing facilities or Discount window: the Central Bank establishes a lending facility just in case any bank finds difficulties borrowing. The rate charged is usually the interest rate announced plus a small premium (+ 0.5% approx).
It is also common for the Central Bank to negotiate other financial assets or treasuries (like gold, bonds from other countries, and foreign currencies) to intervene in the exchange rate or to prepare for it.
Non-conventional monetary policy implementation includes Quantitative Easing and may also include Credit Easing.
Quantitative Easing is called the purchasing of long-maturity government securities.
Credit Easing is called the purchasing of private sector securities.
A Central Bank also regulates financial entities and acts as a lender of last resort to them, especially to those considered “too-big-to-fail” or “too-connected-to-fail”.
The interest it earns through its assets is remitted to the government.