Fiat currency is money issued by a government that is not backed by a physical commodity. Its value comes from the faith and credit of the issuing authority and from legal tender laws that require its acceptance for debts.
Central banks manage fiat currencies through monetary policy. By setting interest rates and controlling the money supply, they influence borrowing, spending, and inflation, shaping economic activity.
Because fiat money can be created at will, excessive issuance can lead to inflation as more units chase the same amount of goods and services. Yet the flexibility of a fiat system lets governments respond to crises, fund public programs, and stabilize markets.
Understanding fiat currency highlights the link between money supply, inflation, and growth. Investors watch central bank decisions because changes in policy ripple through exchange rates, asset prices, and employment.