Chapter Preview
description
Transcript of Chapter Preview
Copyright © 2012 Pearson Education.All rights reserved.
PART FOUR
CENTRAL BANKING AND THE CONDUCT OR MONETARY
POLICY
Copyright © 2012 Pearson Education.All rights reserved.
CHAPTER 9
Central Banks: A Global
Perspective
© 2012 Pearson Education. All rights reserved. 9-3
Chapter Preview
Central banks are the government authorities in change of monetary policy. For example, in the U.S., the central bank is the Federal Reserve System and in Europe it is the European Central Bank. Although we typically hear about central banks in connection with interest rates, their actions also affect credit, the money supply, and inflation (just to name a few areas).
© 2012 Pearson Education. All rights reserved. 9-4
Chapter Preview
In this chapter, we will more closely examine the structure of the major central banks throughout the world. We start with the Fed, looking at both the formal and informal power structure. We then move to the other central banks.
© 2012 Pearson Education. All rights reserved. 9-5
Resistance to establishment of a central bank─ Fear of centralized power─ Distrust of moneyed interests
No lender of last resort─ Nationwide bank panics on a regular basis─ Panic of 1907 so severe that the public was convinced
a central bank was needed
Federal Reserve Act of 1913─ Elaborate system of checks and balances─ Decentralized
Origins of the Federal Reserve System
© 2012 Pearson Education. All rights reserved. 9-6
Structure of The Federal Reserve System
The writers of the Federal Reserve Act wanted to diffuse power along regional lines
Federal Reserve System include the following entities─ The 12 Federal Reserve banks─ The Board of Governors of the Federal Reserve
System─ The Federal Open Market Committee (FOMC)─ The Federal Advisory Council─ Around 2,900 member commercial banks
© 2012 Pearson Education. All rights reserved. 9-7
FIGURE 9.1 Federal Reserve System
Source: Federal Reserve Bulletin.
© 2012 Pearson Education. All rights reserved. 9-8
Federal Reserve Banks
Quasi-public institution owned by private commercial banks in the district that are members of the Fed system
Member banks elect six directors for each district; three more are appointed by the Board of Governors
Together, these nine directors appoint the president of the bank subject to approval by Board of Governors
© 2012 Pearson Education. All rights reserved. 9-9
Functions of the Federal Reserve Banks
Clear checks
Issue new currency
Withdraw damaged currency from circulation
Administer and make discount loans to banks in their districts
Evaluate proposed mergers and applications for banks to expand their activities
© 2012 Pearson Education. All rights reserved. 9-10
Member Banks
All national banks are required to be members of the Federal Reserve System
Commercial banks chartered by states are not required but may choose to be members
Depository Institutions Deregulation and Monetary Control Act of 1980 subjected all banks to the same reserve requirements as member banks and gave all banks access to Federal Reserve facilities
© 2012 Pearson Education. All rights reserved. 9-11
Board of Governors of the Federal Reserve System
Seven members headquartered in Washington, D.C.
Appointed by the president and confirmed by the Senate
14-year non-renewable term
Required to come from different districts
Chairman is chosen from the governors and serves four-year term
© 2012 Pearson Education. All rights reserved. 9-12
Federal Open Market Committee (FOMC)
Meets eight times a year
Consists of seven members of the Board of Governors, the president of the Federal Reserve Bank of New York and the presidents of four other Federal Reserve banks
The chairman of the Board of Governors is also chair of FOMC
Issues directives to the trading desk at the Federal Reserve Bank of New York
© 2012 Pearson Education. All rights reserved. 9-13
How Independent is the Fed?
Instrument and goal independence.
Independent revenue
Fed’s structure is written by Congress, and is subject to change at any time.
Presidential influence─ Influence on Congress─ Appoints members─ Appoints chairman although terms are not concurrent
© 2012 Pearson Education. All rights reserved. 9-14
Structure and Independence of The European Central Bank
The ESCB encompasses the ECB and the National Central Banks of the 27 EU member states
The Eurosystem comprises of the ECB and the NCBs of only the sixteen countries that have adopted the euro
The decision-making process at the EMU takes place at three levels─ The Governing Council, the Executive Board and the
General Council
© 2012 Pearson Education. All rights reserved. 9-15
Governing Council Executive Board and General Council
Governing Council─ The supreme decision-making body of the ECB,
comprises the six members of the Executive Board, plus the governors of the National Central Banks of the 16 Euro area nations
─ Formulate the monetary policy for the Euro area
Executive Board─ President, vice-president and four other members
─ Ensure the day-to-day implementation of the monetary lines of the Governing Council
© 2012 Pearson Education. All rights reserved. 9-16
Governing Council Executive Board and General Council
The General Council─ President, vice-president of the ECB,
representatives of the 16 Euro area countries and the 11 non-Euro zone EU Member States.
─ Performs advisory tasks to the ECB, collects statistical information and standardizes the accounting operations of the NCBs
© 2012 Pearson Education. All rights reserved. 9-17
How Do National Central Banks Operate Within the Eurosystem
Play an essential role in the ESCB
Exercise powers delegated by the Governing Council
Deutsche Bundesbank─ Till 2008 Bundesbank had nine regional offices
and 47 branches throughout Germany
© 2012 Pearson Education. All rights reserved. 9-18
How does the ECB differ from the Bundesbank?
Implements the Eurosystem monetary policy as laid down in the EC Treaty
Clears house for its member banks and the banker’s banker
The Bundesbank is the state’s banker and Federal Government’s fiscal agent
Manages the currency reserves of Germany
Cooperates with other international institutions
© 2012 Pearson Education. All rights reserved. 9-19
How Independent is the ECB?
Most independent in the world
Members of the Executive Board have long terms
Determines own budget
Less goal independent─ Price stability
Charter cannot by changed by legislation; only by revision of the Maastricht Treaty
© 2012 Pearson Education. All rights reserved. 9-20
Bank of Canada─ Essentially controls monetary policy
Bank of England─ Has some instrument independence
Bank of Japan─ Recently (1998) gained more independence
Central Banks in Transition Economies─ Czech, Bulgarian and Hungarian central banks
Central Banks Round The World
© 2012 Pearson Education. All rights reserved. 9-21
The degree of independence of their central banks highly relates to the level of development of the financial sector and political institutions
One main barrier is the low level of capitalization and their inability to generate sources of revenue.
Central Banks in Developing Countries and Emerging Economies
© 2012 Pearson Education. All rights reserved. 9-22
People’s Bank of China
Multinational Central Banks in Developing countries
Central Bank Reforms in South America
Currency Unions in Developing Nations
The Trend Toward Greater Independence
Central Banks in Developing Countries and Emerging Economies
© 2012 Pearson Education. All rights reserved. 9-23
Explaining Central Bank Behavior
Theory of bureaucratic behavior:objective is to maximize its own welfare which is related to power and prestige─ Fight vigorously to preserve autonomy─ Avoid conflict with more powerful groups
Does not rule out altruism
© 2012 Pearson Education. All rights reserved. 9-24
Case for Independence
Political pressure would impart an inflationary bias to monetary policy
Political business cycle
Could be used to facilitate Treasury financing of large budget deficits: accommodation
Too important to leave to politicians—the principal-agent problem is worse for politicians
© 2012 Pearson Education. All rights reserved. 9-25
Case Against Independence
Undemocratic
Unaccountable
Difficult to coordinate fiscal and monetary policy
Has not used its independence successfully
© 2012 Pearson Education. All rights reserved. 9-26
The Federal Reserve System was created in 1913 to lessen the frequency of bank panics.
The Federal Reserve is more independent than most agencies of the U.S. government but is still subject to political pressure.
Chapter Summary
© 2012 Pearson Education. All rights reserved. 9-27
Chapter Summary cont.
The European System of Central Banks has a fairly similar structure to the Federal Reserve System.
Each member country has a National Central Bank, and an Executive Board of the European Central Bank being located in Germany.
The Governing Council is made up of 6 members of the Executive Board, and the Presidents of the National Central Banks.
© 2012 Pearson Education. All rights reserved. 9-28
Chapter Summary cont.
Most developing nations and transition economies have reformed their central banks and granted them increasing levels of independence.
Central banks are gaining more independence throughout the world. Greater independence has been granted to the Bank of England and Bank of Japan.
What are the pros and cons for independent banks?