By distributing central bank cash in return for loans of commercial banks’ assets, central bankers set the overnight price of money, which helps regulate demand and inflation. Most other interest rates depend to some degree on the overnight risk-free rate, but also on the riskiness of lending. This leads to many interest rates bearing only passing resemblance to the overnight risk-free rate. Central banks cannot control these directly.”

It is very interesting to see how various authors describe the core role of a central bank. Most of the subject is factual, yet few understand it. (e.g. the previous Shedlock link).

In this case, the authors are dead right in terms of the core interest rate role. Not many get this far to begin with.

But the second sentence is quite wrong. There is no such ‘exchange’ function as described.

And the third sentence relates to the distribution function for notes and coins, which is important, but is really an operational footnote in terms of the core interaction between the central bank and a bank that holds cash balances with it.

A good article generally.

http://www.youtube.com/watch?v=v7ovjjwyLPg&feature=related