Structure of Central and the Federal Reserve System Saud Saadoun Ziyad Ali.
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Structure of Central and the Federal Reserve System Saud Saadoun Ziyad Ali
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Transcript of Structure of Central and the Federal Reserve System Saud Saadoun Ziyad Ali.
Structure of Central and the Federal Reserve System
Saud SaadounZiyad Ali
The Price Stability Goal & the Nominal Anchor
O Price Stability:O Low & Stable Inflation.O Most important goal of monetary policy.O Desirable because rising price level = creates
uncertainty = hamper economic growth.
O Inflation makes it difficult to plan for the future
O Inflation can strain a country’s social fabric:O Conflict could resultO Each group may compete with the other to make sure
that income keeps up with rising level of price
The Role of a Nominal Anchor
A central element in successful monetary policy is the use of a nominal anchor
O Nominal Anchor:O A nominal variable such as the nominal exchange rate,
wage and price controls, or the money supply, which ties down the price level to achieve price stability.
LIMITS
O Time-inconsistency problem:O Monetary policy conducted on a discretionary.
Other Goals Of Monetary Policy
O High Employment:O High unemployment causes much human miseryO The economy has both idle workers & idle
resources resulting in loss of output
O 2 reasons unemployment is not “0” at Full employment:O Frictional unemploymentO Structural unemployment
Other Goals Of Monetary Policy
O Economic growth:
O Related to high employment goal
O Policies that encourage firms to invest
O Stated purpose of Supply-side economics
O Intended to spur economic growth by providing tax incentives for businesses to invest in facilities & equipment and for tax payers to save more
Other Goals Of Monetary Policy
O Stability of Financial markets
O Interest-Rate Stability:
O Fluctuation can create uncertainty in the economy
O Central bank want to reduce upward movements in interest rates
O Generate hostility toward central banks and lead to demands that their power be curtailed
Should price stability be the primary goal of Monetary policy
O Price Stability is an important factor for long-run health of an economy
O When this is Mandatory over other factors, its known as HIERARCHICAL MANDATE
O Used by ECB, Bank of England, Bank of Canada, Reserve Bank of New Zealand to name a few
Should price stability be the primary goal of Monetary policy
O When price stability is achieved along with high employment or stable long-term interest rates, its known as DUAL MANDATE
O Used by the Fed
So which one is better?
O No inconsistency in attaining price stability in long-run with full employment
O Since low and stable inflation promotes economic growth, Central Bankers agree
O Price Stability should be the primary goal, only in the long-run.
Origins of the federal reserve
O American Resistance to the formation of a central bankO Fear of centralized powerO American distrust of moneyed interest
O Led to a fall of the experimental central banksO The first bank of united states in 1811O The second bank of united states in 1836
O Led to a panic in the American financial marketsO No lender available to provide needed reserves
O Led to the formation of the Federal Reserve Act of 1913O Forming what is known today as the
Federal Reserve SystemO 12 regional federal banks throughout
USO Today, commonly known as the Fed
O Not to be confused with the Feds (FBI)
Checks and Balances at the Fed
Federal Reserve System
Federal Reserve Districts
1. Boston2. New York
O Serves Puerto Rico and U.S Virgin Islands
3. Philadelphia4. Cleveland5. Richmond6. Atlanta7. Chicago
8. St. Louis9. Minneapolis10. Kansas City11. Dallas12. San Francisco
O Seattle serves Alaska
O San Francisco serves Hawaii
Federal Reserve System contd...
O Part private-part public institutions owned by private regional banksO Which are members of the federal reserve
systemO Member banks purchase stock in their
district federal reserve bankO A requirement for membership
O Member banks elect 6 directors for each district bank, 3 or more by the Board of governersO These 9 directors then appoint the president
2011 Committee Members
O Ben S. Bernanke, Board of Governors, Chairman
O William C. Dudley, New York, Vice ChairmanO Elizabeth A. Duke, Board of GovernorsO Charles L. Evans, ChicagoO Richard W. Fisher, DallasO Narayana Kocherlakota, MinneapolisO Charles I. Plosser, PhiladelphiaO Sarah Bloom Raskin, Board of GovernorsO Daniel K. Tarullo, Board of GovernorsO Janet L. Yellen, Board of Governors
Functions of the FedO Clear checks
O Issue new currency
O Withdraw damaged currency from circulation
O Administer and make discount loans to banks in their districts
O Evaluate proposed mergers and applications for banks to expand their activities
Functions of FedO Act as liaisons between the business
community and the Federal Reserve System
O Examine bank holding companies and state-chartered member banks
O Collect data on local business conditions
O Use staffs of professional economists to research topics related to the conduct of monetary policy
Most important functions of the Fed
O Maintenance of monetary and credit policy for sound business activities inO AgriculturalO IndustrialO Commercial
O Lending to member banksO Open-market operationsO Fixing reserve requirementsO Establishing discount ratesO Issuing regulations for the above
Member banksO All national banks are required to be
members of the Fed
O Commercial banks chartered by states are not required but may choose to be members
O 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
Members and Non-Members of the Fed
National Bank
State Bank (Member)
State Bank (Non-
Member)
Board of Governors of the Fed
O 7-member Board of Governors Head-Quartered in Washington D.C.
O Each governor is appointed by the US President and confirmed by the US Senate to a single (non-renewable) 14 year term
O The seven governors must come from different districts to prevent regional dominance
O The Chairman of the Board of Governors is selected from this group and subject to reappointment every four years by the U.S. President.
Federal Open Market Committee
O Meets eight times a year
O 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
O Chairman of the Board of Governors is also chair of FOMC
O Issues directives to the trading desk at the Federal Reserve Bank of New York
How Independent is the Fed
O Instrument independent
O Goal independent
O Independent revenue
O Structured by legislation from Congress and accountable for its actions
O Presidential influenceO Influence on CongressO Appoints membersO Appoints chairman although terms are
not concurrent
How Independent is the ECB?
O The most independent central bank in the world
O Eurosystem determines its own budget
O Governments are not allowed to issue instructions
O Prohibited from granting loans to national public sector entities
The Fed and the ECB: Similarities and Differences
CompositionO Federal Reserve System (Fed)
O 12 Central BanksO 7 Board of Governors based in Washington
to look over the Fed System
O European Central Bank (ECB)O 11 national central banks for each countryO 6 Members of the Executive Board of the
ECB based in Frankfurt to oversee the ECB
Size of the core institutions
O FedO 1700 employees
O ECBO 600 employees
Appointments to the core institution
O FedO The 7 members of BoG appointed for 14-year
terms by US President, approved by the Senate
O The terms of appointment are staggered so that no President appoints more than two members of the Board
O However, not all members serve the full 14 years of their term, so Presidents do sometimes appoint more members than initially intended
Appointments to the core institution
O ECB
O The 6 members of the Executive Board of the ECB are appointed by the Council of Europe for 7-year terms
O Appointments subject to consultation with O European CommissionO European ParliamentO Executive Board of ECB
O Unlike US senate, they do not have a right of veto over appointments
The Roles of the Fed and the ECB
O FedO Monetary PolicyO Banker to the Government and Banks
O ECBO Monetary Policy
Other DifferencesO ECB
O National Central Banks control their own budgets and the budget of the ECB
O Monetary operations are not centralized
O Does not supervise and regulate financial institutions
Central Banks around the World
O Bank of Canada
O Founded in 1934O Directors appointed by government for 3-year
terms who choose a governor for a 7-year termO Governing council is made up of 4 deputy
governers and the governorO Policymaking body like the FOMC
O Bank of England
O Founded in 1694, one of the oldestO Bank Act of 1946 gave government
statuory authority of over BoEO The Court is made up of the governer and
2 deputy governors appointed for 5-year terms
O 16 non-executive directors for 3-year terms
OSAMAO Founded in 1952O Governor: Muhammad Al-Jasser
Central Bank Behavior
O Theory of bureaucratic behavior—objective is to maximize its own welfare which is related to power and prestigeO Fight vigorously to preserve
autonomyO Avoid conflict with more powerful
groups
O Does not rule out altruism
Should Central Banks be Independent: Arguments For
O The strongest argument for independence is that an independent central bank is insulated from the political pressures of re-election
O Fiscal policy tends to follow a “political business cycle” inflationary during an election year, contractionary afterwards.
O If central banks were subject to political approval, monetary policy would also follow this volatile pattern
O Another argument in favor of central bank independence is that elected politicians do not have the technical savvy to conduct monetary policy
O Proponents of this view contrast the efficiency of a Federal Reserve run by bureaucrats with the bloated Federal budget (often in deficit) run by politicians
O If the central bank was beholden to political interests, the federal government could amass large budget deficits then turn to the Fed to pay off its debts (essentially printing up more money for the government to pay off its debts)
O Every time this has happened in history, massive inflation and financial crises have been the result.
Arguments Against
O Is it democratic to have monetary policy for the entire nation in the hands of an “elite” group responsible to no one?
O If the Fed performs badly, there are few ways to replace its members (unlike Congress where the people can vote out underperforming legislators)
O If policy is best conducted by technically savvy elites, then why aren’t all military decisions made by the Joint Chiefs of Staff, all tax policy decisions made by the IRS, all environmental regulations made by the EPA, etc.?
O This criticism gains credence when you consider that the Fed has been a poor steward of the economy at times (failing to act early enough during the Great Depression, inflating the economy during the 1960’s.)
O Close coordination between monetary and fiscal policy would achieve the most effective results. The best way to coordinate both types of policies would be to have them controlled by the same group.
Central Bank Independence
O Lets see the consequences of an Independent Fed
