Final answer:
A short term facility in the context of the Irish Central Bank is an emergency loan provided to financial institutions during a crisis.
Step-by-step explanation:
A short term facility as an instrument of the Irish Central Bank refers to the provision of temporary financing to financial institutions in need. These are typically called emergency loans that serve as a lender of last resort in financial crises, helping to sustain liquidity in the banking system.
This role was notably crucial during events such as the 1987 stock market crash and the 2008-2009 recession, ensuring the continuous function of the financial system. A central bank executes this through several tools, including open market operations, which involve buying or selling Treasury bonds to manage the money supply and influence short-term interest rates like the federal funds rate.
This rate is pivotal as it is the interest at which banks lend to each other overnight, hinting at the liquidity and health of the financial system.
The strategy of the central bank, such as inflation targeting, ensures that monetary policy is geared towards keeping inflation in check, often by manipulating the federal funds rate through open market operations or other means.
During times of financial stress, the ability of a local bank to lend without holding significant reserves is facilitated by the central bank's readiness to provide credit, thereby preventing a potential credit crunch.