Transcript Structure of Central and the Federal Reserve

Structure of Central and
the Federal Reserve System
Saud Saadoun
Ziyad 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 result
O 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 misery
O 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 unemployment
O 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 bank
O Fear of centralized power
O American distrust of moneyed interest
O Led to a fall of the experimental central banks
O The first bank of united states in 1811
O The second bank of united states in 1836
O Led to a panic in the American financial markets
O No lender available to provide needed reserves
O Led to the formation of the Federal Reserve
Act of 1913
O Forming what is known today as the Federal
Reserve System
O 12 regional federal banks throughout US
O 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.
2.
Boston
New York
O
3.
4.
5.
6.
7.
Serves Puerto Rico
and U.S Virgin
Islands
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
8. St. Louis
9. Minneapolis
10. Kansas City
11. Dallas
12. 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 banks
O Which are members of the federal reserve system
O Member banks purchase stock in their district
federal reserve bank
O A requirement for membership
O Member banks elect 6 directors for each district
bank, 3 or more by the Board of governers
O These 9 directors then appoint the president
2011 Committee Members
O
O
O
O
O
O
O
O
O
O
Ben S. Bernanke, Board of Governors, Chairman
William C. Dudley, New York, Vice Chairman
Elizabeth A. Duke, Board of Governors
Charles L. Evans, Chicago
Richard W. Fisher, Dallas
Narayana Kocherlakota, Minneapolis
Charles I. Plosser, Philadelphia
Sarah Bloom Raskin, Board of Governors
Daniel K. Tarullo, Board of Governors
Janet L. Yellen, Board of Governors
Functions of the Fed
O 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 Fed
O 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 in
O Agricultural
O Industrial
O Commercial
O Lending to member banks
O Open-market operations
O Fixing reserve requirements
O Establishing discount rates
O Issuing regulations for the above
Member banks
O 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 State Bank State Bank
Bank
(Member) (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 influence
O Influence on Congress
O Appoints members
O 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
Composition
O Federal Reserve System (Fed)
O 12 Central Banks
O 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 country
O 6 Members of the Executive Board of the ECB
based in Frankfurt to oversee the ECB
Size of the core institutions
O Fed
O 1700 employees
O ECB
O 600 employees
Appointments to the core
institution
O Fed
O 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 Commission
O European Parliament
O 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 Fed
O Monetary Policy
O Banker to the Government and Banks
O ECB
O Monetary Policy
Other Differences
O 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 1934
O Directors appointed by government for 3-year terms who
choose a governor for a 7-year term
O Governing council is made up of 4 deputy governers and the
governor
O Policymaking body like the FOMC
O Bank of England
O Founded in 1694, one of the oldest
O Bank Act of 1946 gave government statuory
authority of over BoE
O 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
O SAMA
O Founded in 1952
O 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 prestige
O Fight vigorously to preserve autonomy
O 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