monetary economics mishkin ch 12

Chapter 12Structure of Central Banks and the Federal Reserve System

Copyright 2007 Pearson Addison-Wesley. All rights reserved.

Origins of the Federal Reserve SystemResistance to establishment of a central bankFear of centralized powerDistrust of moneyed interestsFirst U.S. experiments with a central bank terminated in 1811 and in 1836No lender of last resortNationwide bank panics on a regular basisPanic of 1907 so severe that the public was convinced a central bank was neededFederal Reserve Act of 1913Elaborate system of checks and balancesDecentralizedCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Federal Reserve BanksQuasi-public institution owned by private commercial banks in the district that are members of the Fed systemMember banks elect six directors for each district; three more are appointed by the Board of GovernorsThree A directors are professional bankersThree B directors are prominent leaders from industry, labor, agriculture, or consumer sectorThree C directors appointed by the Board of Governors are not allowed to be officers, employees, or stockholders of banksCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Federal Reserve Banks (contd)Member banks elect six directors for each district; three more are appointed by the Board of Governors (contd)Designed to reflect all constituencies of the publicNine directors appoint the president of the bank subject to approval by Board of GovernorsCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Functions of the Federal Reserve BanksClear checksIssue new currencyWithdraw damaged currency from circulationAdminister and make discount loans to banks in their districtsEvaluate proposed mergers and applications for banks to expand their activitiesCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Functions of the Federal Reserve Banks (contd)Act as liaisons between the business community and the Federal Reserve SystemExamine bank holding companies and state-chartered member banksCollect data on local business conditionsUse staffs of professional economists to research topics related to the conduct of monetary policyCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Federal Reserve Banks and Monetary PolicyDirectors establish the discount rateDecide which banks can obtain discount loansDirectors select one commercial banker from each district to serve on the Federal Advisory Council which consults with the Board of Governors and provides information to help conduct monetary policyFive of the 12 bank presidents have a vote in the Federal Open Market Committee (FOMC)Copyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Member BanksAll national banks are required to be members of the Federal Reserve SystemCommercial banks chartered by states are not required but may choose to be membersDepository 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 facilitiesCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Board of Governors of the Federal Reserve SystemSeven members headquartered in Washington, D.C.Appointed by the president and confirmed by the Senate14-year non-renewable termRequired to come from different districtsChairman is chosen from the governors and serves four-year termCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Duties of the Board of GovernorsVotes on conduct of open market operationsSets reserve requirementsControls the discount rate through review and determination processSets margin requirementsSets salaries of president and officers of each Federal Reserve Bank and reviews each banks budgetCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Duties of the Board of Governors (contd)Approves bank mergers and applications for new activitiesSpecifies the permissible activities of bank holding companies Supervises the activities of foreign banks operating in the U.S.Copyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Chairman of the Board of GovernorsAdvises the president on economic policyTestifies in CongressSpeaks for the Federal Reserve System to the mediaMay represent the U.S. in negotiations with foreign governments on economic mattersCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Federal Open Market Committee (FOMC)Meets eight times a yearConsists 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 banksChairman of the Board of Governors is also chair of FOMCIssues directives to the trading desk at the Federal Reserve Bank of New YorkCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


FOMC MeetingReport by the manager of system open market operations on foreign currency and domestic open market operations and other related issuesGreen Book forecastGo-roundCurrent monetary policy and domestic policy directiveBlue bookPresentation on relevant Congressional actionsPublic announcement about the outcome of the meetingCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Chairman Runs the ShowSpokesperson for the Fed and negotiates with Congress and the PresidentSets the agenda for meetingsSpeaks and votes first about monetary policySupervises professional economists and advisersCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


How Independent is the Fed?Instrument independentGoal independentIndependent revenueStructured by legislation from Congress and accountable for its actionsPresidential influenceInfluence on CongressAppoints membersAppoints chairman although terms are not concurrentCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


European Central BankPatterned after the Federal ReserveCentral banks from each country play similar role as Fed banksExecutive BoardPresident, vice-president and four other members Eight year, nonrenewable termsGoverning CouncilCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


DifferencesNational Central Banks control their own budgets and the budget of the ECBMonetary operations are not centralizedDoes not supervise and regulate financial institutionsCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Governing CouncilMonthly meetings at ECB in Frankfurt, GermanyTwelve National Central Bank heads and six Executive Board membersOperates by consensusECB announces the target rate and takes questions from the mediaTo stay at a manageable size as new countries join, the Governing Council will be on a system of rotationCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


ECB IndependenceMost independent in the worldLong termsDetermines own budgetLess goal independentPrice stabilityCharter cannot by changed by legislation; only by revision of the Maastricht TreatyCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Central Bank BehaviorTheory of bureaucratic behavior objective is to maximize its own welfare which is related to power and prestigeFight vigorously to preserve autonomyAvoid conflict with more powerful groupsDoes not rule out altruismCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Case for IndependencePolitical pressure would impart an inflationary bias to monetary policyPolitical business cycleCould be used to facilitate Treasury financing of large budget deficitsaccommodationToo important to leave to politiciansthe principal-agent problem is worse for politiciansCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


Case Against IndependenceUndemocraticUnaccountableDifficult to coordinate fiscal and monetary policyHas not used its independence successfullyCopyright 2007 Pearson Addison-Wesley. All rights reserved.12-*


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monetary economics mishkin ch 12

Documents

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federal advisory council

neededfederal reserve

publicnine directors