Transcript The Fed vs. The ECB - Econometrics at Illinois

The ECB vs. The Fed
By:
Kostas Konstantinou
Rafael Vera
Kanut Yang
Shuo Zhang
Introduction
 The
purpose of this presentation is
to give you a brief overview of the
history, structure, objectives, and
monetary policy strategies of The
European Central Bank (ECB) and
The Federal Reserve System (Fed).
History of The European
Central Bank
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Officially established on June 1st, 1998.
Headquarters are located in Frankfurt, Germany.
President is Jean-Claude Trichet.
13 Member countries: Belgium, Germany, Ireland,
Greece, Spain, France, Italy, Luxembourg, The
Netherlands, Austria, Portugal, Slovenia, and
Finland.
Currency: Euro (EUR), €
Exchange rate: €1 = $1.36
Structure of The ECB
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Modeled after the German
Bundesbank.
Governed by a six member
Executive Board of Directors.
Headed by a President and a
Board of Governors.
Comprised of The ECB and
the Local Central Banks of
the 27 European Union
Member States.
Objectives of The ECB
 Three
Main Objectives:
Maintain Price Stability
Support General Economic
Policies of the European Union
States
Ensure an Open Market Economy
Monetary Policy of The ECB
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Price Stability is the main goal of The
ECB’s Monetary Policy. Why?
Leads to less fluctuation of the price
level.
Reduces Inflation Risk Premium.
Helps eliminate the real economic
costs affected by distorted inflation.
Monetary Policy Instruments of
The ECB
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Three Main Instruments:
 Open Market Operations:
 Important tool for managing interest rates,
market liquidity, and signaling the next policy
movement.
 Standard Facilities
 Minimum Reserves:
 Provide stability of money market interest rates.
History of The Federal
Reserve System
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Founded by The United States Congress in 1913.
Headquarters are located in Washington, D.C.
Chairman is Ben Bernanke.
12 Federal Reserve District Banks: Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago,
St. Louis, Minneapolis, Dallas, Kansas City, and San
Francisco.
Currency: U.S. Dollar (USD), $
Exchange rate: $1 = €.73
Structure of The Fed
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Modeled after some of the oldest
European central banks in history; such
as, Sweden’s Riksbank (1668), the Bank
of England (1694), and the Banque
France (1800). Also, served as a loose
model for the reestablishment of
Germany’s Bundesbank after WWII.
Governed by The Federal Reserve Board
of Governors, which includes the
chairman, and The Federal Open Market
Committee (FOMC).
Comprised of the 12 Federal Reserve
Banks and the member banks (mostly
commercial banks).
Objectives of The Fed
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Four Main Objectives:
 Administer the U.S. Monetary Policy
 Supervise and regulate banking institutions
 Maintain the stability of the financial system
 Provide financial services to depository institutions,
the U.S. government, and foreign official
institutions
Also, plays a major role in operating the nation’s
payment system.
Monetary Policy of The Fed
 Promoting
effectively maximum
employment, stable prices, and
moderate long-term interest
rates is the main goal of The
Fed’s Monetary Policy.
Monetary Policy Instruments of
The Fed
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Three Main Instruments:
 Open Market Operations:
 Consist of the purchase of sale of U.S. Treasury and
Federal Agency securities.
 Discount Rate:
 Discount Rate manipulation.
 Reserve Requirements:
 Defined as the amount of funds that a depository
institution must hold in reserve in-order-to support
specified deposit liabilities.
Critique & Conclusion
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As can be seen from our analysis, The ECB and The
Fed are following similar Monetary Policy strategies.
Some key similarities between the two Banks are:
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Price Stability is a priority.
Similar Inflation Targets are set.
Focus is placed on signaling their decisions regarding changes
in short-term interest rates in advance.