Copyright © 2010 Pearson Education. All rights reserved. Chapter 13 Central Banks: A Global Perspective

Copyright © 2010 Pearson Education. All rights reserved.

Chapter 13

Central Banks: A Global Perspective

Copyright © 2010 Pearson Education. All rights reserved.13-2

• Low and stable inflation

• Inflation– Creates uncertainty and difficulty in planning for

the future– Lowers economic growth– Strains social fabric

• Nominal anchor ( 如 : 名目匯率、工資、物價、貨幣供給 ) to contain inflation expectations

• The Time-inconsistency problem

The Price Stability Goal And The Nominal Anchor


Other Goals of Monetary Policy

• High employment

• Economic growth

• Stability of financial markets

• Interest-rate stability

• Stability in foreign exchange market

• 我國中央銀行經營的目標 : 一、促進金融穩定。二、健全銀行業務。三、維護對內及對外幣值之穩定。四、協助經濟之發展。


Should Price Stability be the Primary Goal ?

• In the long run there is no inconsistency between the goals

• In the short run it can conflict with the goals of high employment and interest-rate stability

• Hierarchical mandate

• Dual mandate


Origins of the Federal Reserve System

• 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


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


FIGURE 2 Federal Reserve System

Source: Federal Reserve Bulletin.


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


Functions of the Federal Reserve Banks

1.Clear checks

2.Issue new currency

3.Withdraw damaged currency from circulation

4.Administer and make discount loans to banks in their districts

5.Evaluate proposed mergers and applications for banks to expand their activities


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


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


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


How Independent is the Fed?

1.Instrument and goal independence. 2.Independent revenue3.Fed’s structure is written by Congress, and is

subject to change at any time. 4.Presidential influence

– Influence on Congress– Appoints members– Appoints chairman although terms are not

concurrent


我國中央銀行之組織

• 監事會 ( 五人至七人，任期三年，行政院主計長為當然監事 ) 、理事會 ( 十一人至十五人，任期五年，總裁、財政部長及經濟部長為當然理事，並為常務理事外，應有實際經營農業、工商業及銀行業者至少各一人 )

• 總裁、副總裁 ( 任期均為五年 ) 下的部門有：業務局、發行局、外匯局、國庫局、金融業務檢查處、經濟研究處、秘書處、會計處、資訊處、人事室、政風室、法務室、紐約代表辦事處、倫敦代表辦事處、中央印製廠、中央造幣廠。


Structure and Independence of The European Central Bank

• The ESCB(1999) 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


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


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


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


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


How Independent is the ECB?

1.Most independent in the world2.Members of the Executive Board have long

terms(8 years)3.Determines own budget4.Less goal independent

– Price stability

5.Charter cannot by changed by legislation; only by revision of the Maastricht Treaty


• Bank of Canada(1934)– Essentially controls monetary policy

• Bank of England(1694)– Has some instrument independence

• Bank of Japan(1882)– Recently (1998) gained more independence

• Central Banks in Transition Economies– Czech, Bulgarian and Hungarian central banks

Central Banks Round The World


• 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


• 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


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


Case for Independence

1.Political pressure would impart an inflationary bias to monetary policy

2.Political business cycle

3.Could be used to facilitate Treasury financing of large budget deficits: accommodation

4.Too important to leave to politicians—the principal-agent problem is worse for politicians


Case Against Independence

1.Undemocratic2.Unaccountable3.Difficult to coordinate fiscal and monetary

policy4.Has not used its independence successfully

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Copyright © 2010 Pearson Education. All rights reserved. Chapter 13 Central Banks: A Global Perspective