Central Bank Mandate

Central Banks try to keep their economy within a stable target range of economic growth. This is called a “central bank mandate” and possibilities include Inflation, GDP growth, or Employment levels. One individual mandate prioritized over others by each Central Bank, but Inflation is a common mandate.

Beyond the Central Bank Mandate

The central bank will take measures that will slow the economy down if GDP Growth accelerates too fast beyond the central bank mandate, Inflation rises too high, or employment rises too high. These measures extend the business cycle while hopefully preventing hyperinflation or asset price bubbles in the economy.

If an economy is near overheating, a deflationary bias will eventually become accurate, since the central bank will act to slow the economy down via rate raises and other actions. If they get their way, the economy will slow and disinflate.

Below the Central Bank Mandate

If GDP Growth decelerates or falls too far below the central bank mandate, Inflation falls too low, Deflation is a possibility, or employment falls too low, the central bank will take measures that grow or accelerate the economy. These measures hopefully improve the economy and end the recession, restoring business and consumer confidence.

If an economy is in recession, an inflationary bias will eventually become accurate, since the central bank will act to accelerate the economy via rate decreases, quantitative easing, and other actions. If they get their way, inflation will return.

Non-Mandate Desires

Rarely, a Central Bank has another desire: Maintaining their currency’s value relative to another nation. Maintaining a currencies value relative to another currency allows their domestic economy to consistently export goods and services to another nation that is a primary trade partner. This stabilizes the economy’s exports, which is driving their Gross Domestic Product and providing an income into their economy. If their currency exceeds the desired value relative to the other nation, the central bank will act to ensure that the currency returns to the desired former range. If their currency became too expensive relative to their primary export partner’s currency, the nation they primarily export goods and services to would stop purchasing their goods, hurting their economy.