ABSTRACT
Since the first central bank, Sveriges Riksbank started operations in Sweden, 1668, central banks have been established in most economies and monetary unions, as domestic monetary authorities. This chapter discusses how the central bank exploits the bank lending channel and conducts monetary policy, i.e., how the central bank influences banks’ credit supply to real economy through its policy instruments. It discusses how bank lending may be affected by the central bank’s quantity and price tools through highly stylized models, and briefly describe how they are conducted in practice—both in normal times and in crises. The chapter presents the bank lending channel of monetary policy, i.e., the mechanism how banks internalize monetary policy in their liquidity management and adjust their lending decisions. It shows how the central bank keeps bank lending under control, through its monetary policy tools.
