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    Chapter 9 Central Banks

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    Jay Ann Dome
    The European Central Bank (ECB) oversees monetary policy in the Eurozone. It was established in 1998 and is comprised of the central banks of Eurozone member states. The ECB's Governing Council sets interest rates and its primary objective is price stability. It implements decisions through national central banks and open market operations. The Federal Reserve System performs similar functions in the United States, regulating banks and setting monetary policy through the Federal Open Market Committee. Central bank independence is believed to promote effective monetary policy but some argue it reduces coordination between monetary and fiscal policy.

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    Chapter 9 Central Banks

    Uploaded by

    Jay Ann Dome
    57 views21 pages
    The European Central Bank (ECB) oversees monetary policy in the Eurozone. It was established in 1998 and is comprised of the central banks of Eurozone member states. The ECB's Governing Council sets interest rates and its primary objective is price stability. It implements decisions through national central banks and open market operations. The Federal Reserve System performs similar functions in the United States, regulating banks and setting monetary policy through the Federal Open Market Committee. Central bank independence is believed to promote effective monetary policy but some argue it reduces coordination between monetary and fiscal policy.

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    The European Central Bank (ECB) oversees monetary policy in the Eurozone. It was established in 1998 and is comprised of the central banks of Eurozone member states. The ECB's Governing Council sets interest rates and its primary objective is price stability. It implements decisions through national central banks and open market operations. The Federal Reserve System performs similar functions in the United States, regulating banks and setting monetary policy through the Federal Open Market Committee. Central bank independence is believed to promote effective monetary policy but some argue it reduces coordination between monetary and fiscal policy.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    57 views21 pages

    Chapter 9 Central Banks

    Uploaded by

    Jay Ann Dome
    The European Central Bank (ECB) oversees monetary policy in the Eurozone. It was established in 1998 and is comprised of the central banks of Eurozone member states. The ECB's Governing Council sets interest rates and its primary objective is price stability. It implements decisions through national central banks and open market operations. The Federal Reserve System performs similar functions in the United States, regulating banks and setting monetary policy through the Federal Open Market Committee. Central bank independence is believed to promote effective monetary policy but some argue it reduces coordination between monetary and fiscal policy.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 21

    CHAPTER 9:

    CENTRAL BANKS
    THE EUROPEAN CENTRAL BANK, THE EURO SYSTEM, AND
    THE EUROPEAN SYSTEM OF CENTRAL BANKS

    • The European Central Bank (ECB) came into existence on


    June 1, 1998, in order to handle the transitional issues of
    the nations that comprise the Eurozone.
    • The Eurozone is an economic and monetary union
    consisting of the member states of the European Union
    (EU) that have adopted the euro as their currency.
    • The Eurosystem comprises the ECB and the NCBs of
    those EU member states that have adopted the euro.
    COUNTRIES COMPRISING THE EU
    • Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus,
    Czech Republic, Denmark, Estonia, Finland, France,
    Germany, Greece, Hungary, Ireland, Italy, Latvia,
    Lithuania, Luxembourg, Malta, Netherlands, Poland,
    Portugal, Romania, Slovakia, Slovenia, Spain and Sweden
    • All of the member states of the European Union have to
    comply with a set of economic criteria and legal
    preconditions.
    • THE GOVERNING COUNCIL is the chief decision-
    making body of the ECB responsible for formulating
    monetary policy in the euro area.
    • It consists of the ECB’s president and vice-president, four
    members of the Executive Board as well as the governors of
    the 19 National Central Banks of the euro-area countries.
    • Its main function is to conduct monetary policy and its
    primary objective is to maintain price stability in the euro
    area.
    • THE EXECUTIVE BOARD of the ECB is appointed by the
    European Council.
    • Decisions of the ECB’s Governing Council are made based on
    majority voting.
    • While the ECB’s Executive Board members hold permanent
    voting rights, governors of NCBs take turns holding voting
    rights in the Governing Council on a monthly-rotation basis.
    • The Executive Board of the ECB is responsible for the day-to-
    day operations and management of the ECB and the
    Eurosystem.
    • Implements the decisions of the Governing Council by
    giving instructions to the corresponding NCBs.
    • Comprises the following six members: the president and
    the vice-president of the ECB, and four other members
    who take decisions in their personal capacity, not as
    representatives of a given country or institutions and who
    are of high standing and professional experience in the
    monetary and/or financial fields.
    • THE GENERAL COUNCIL of the ECB, which comprises
    the president and the vice-president of the ECB in addition
    to the governors of the NCBs of the 28 EU member states.
    • To encourage cooperation between the National Central
    Banks of the member states of the EU.
    • To perform a number of important advisory functions such
    as collecting statistical information for the ECB, preparing
    the ECB’s annual reports, and standardizing the accounting
    and reporting operations of the NCBs.
    HOW MONETARY POLICY IS CONDUCTED WITHIN THE ECB

    • The three main objectives of the ECB are:


    1. To maintain price stability in the economies of the EU;
    2. To support the economic policies of the Eurozone nations;
    3. To ensure an independent and open market economy .
    The ECB endeavors to maintain its independence from
    governments.
    The Governing Council of the ECB sets the following three key
    policy interest rates:
    • DEPOSIT FACILITY RATE, which is the rate on tenders to
    banks. It is the most important policy rate because it provides the
    bulk of liquidity to the banking system and determines how far down
    the ECB’s quantitative easing program can push sovereign bond
    yields;
    • REFINANCING RATE, which is the rate on overnight deposits
    with the Eurosystem;
    • MARGINAL LENDING FACILITY RATE, which is the rate on
    overnight credit to banks from the Eurosystem.
    • The ECB’s operational framework consists of the
    following set of conventional monetary policy
    instruments:
    1. open market operations;
    2. standing facilities to provide and absorb overnight
    liquidity (rediscounting rate);
    3. minimum or required reserve requirements for
    credit institutions.
    UNCONVENTIONAL OR NON-STANDARD
    MONETARY POLICY MEASURES
    1. EMERGENCY LIQUIDITY ASSISTANCE (ELA)-
    provides liquidity and loans exceptionally to solvent
    banking and financial institutions that are facing temporary
    liquidity problems.
    2. QUANTITATIVE EASING, where central banks buy
    sovereign bonds and/or other financial assets from
    commercial banks and financial institutions to increase
    money supply and stimulate the economy.
    Examples of Quantitative Easing:
    1. ASSET PURCHASE PROGRAMMES (APP)
    purchases of public sector securities, private sector bonds, and
    asset-backed securities. APP addresses the risks of prolonged
    periods of deflation.
    2. SECURITIES MARKET PROGRAMME (SMP)
    strictly limits purchases of government bonds by the Eurosystem
    to secondary markets.
    All of these non-traditional monetary policy tools were temporary
    and aimed at providing liquidity to financial markets and reducing
    pressures on interest rates.
    THE FEDERAL RESERVE SYSTEM
    • One of the largest and most influential central banks in the world
    • Is subject to oversight from Congress that periodically reviews its
    activities, but its decisions are made totally independent of the
    U.S. government.
    • Supervises and regulates the nation’s financial institutions and
    simultaneously serves as their banker.
    • Generates income from services provided to member banks and
    from interest earned on government securities, foreign currency
    and loans to financial institutions.
    COMPOSITION OF THE FEDERAL RESERVE SYSTEM
    • The Federal Reserve Board of Governors (FRB) which mainly
    assumes regulatory and supervisory responsibilities over member
    banks.
    • The Federal Open Market Committee (FOMC): comprises 12
    members; decides on the interest rates and monetary policy.
    • The 12 Federal Reserve banks that are located in major cities
    throughout the nation
    • Private U.S. member banks
    • The Federal Advisory Council
    CENTRAL BANKS AND INDEPENDENCE
    • The more independent a central bank the more
    effective monetary policy is.
    • Two key dimensions of central bank independence:
    1. GOAL INDEPENDENCE- encompasses those
    institutional characteristics that insulate the central
    bank from political influence in defining its monetary
    policy objectives.
    • 2. INSTRUMENT INDEPENDENCE- refers to
    the ability of the central bank to freely implement
    policy instruments in its pursuit to meet its
    monetary goals.
    The degree of independence of central banks
    depends largely on the preferences and
    circumstances of each nation.
    THE CASE FOR INDEPENDENCE

    1. Political business cycle- result of political pressure to boost


    output in the short run—mainly before elections—in order to
    finance government spending to lower unemployment and
    interest rates that have potentially inflationary biases.
    • Expansionary monetary policies are reversed after the
    election to limit inflation, unnecessarily leading to
    macroeconomic instability or booms and busts.
    2. The public not only generally distrusts
    politicians in regard to making politically
    motivated decision, but also due to their lack of
    expertise in conducting monetary policy.
    3. Politicians can grant more independence to the
    central bank in order to avoid public criticism
    regarding unpopular macroeconomic decisions.
    THE CASE AGAINST INDEPENDENCE
    1. Macroeconomic stability can be best achieved if monetary policy
    is properly coordinated with fiscal policy.
    2. The theory of bureaucratic behavior suggests that the objective
    of a bureaucracy is to maximize its own welfare, akin to
    consumer’s behavior that aims at maximizing personal welfare.
    The central bank can pursue a course of narrow self-interest to
    increase its power and prestige at the expense of public interest.

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