part iii central banking and the conduct of monetary policy
TRANSCRIPT
Part III
Central Banking and the Conduct of Monetary Policy
Chapter Six
Structure of Central Banks and the Federal Reserve System
Copyright © 2003 Pearson Education, Inc. Slide 6–4
Formal Structure of the Fed
Figure 6.1: Formal Structure and Allocation of Policy Tools in the Federal Reserve
Federal Reserve home pagehttp://www.federalreserve.gov/
Copyright © 2003 Pearson Education, Inc. Slide 6–5
Federal Reserve Districts
Figure 6.2: Federal Reserve System
Copyright © 2003 Pearson Education, Inc. Slide 6–6
Informal Structure of the Fed
Figure 6.3: Informal Power Structure of the Federal Reserve System
Copyright © 2003 Pearson Education, Inc. Slide 6–7
Central Bank Independence
• Factors making Fed independent1. Members of Board have long terms
2. Fed is financially independent—this is most important
• Factors making Fed dependent1. Congress can amend Fed legislation
2. President appoints Chairmen and Board members and can influence legislation
• Overall, Fed is quite independent
Copyright © 2003 Pearson Education, Inc. Slide 6–8
Central Bank Independence
• Other Central Banks
1. Bank of Canada and Bank of Japan—fair degree of independence, but not all on paper
2. Bank of England and Bank of Japan made more independent in 1997 and 1998, respectively.
3. European Central Bank most independent
4. Trend to greater independence
Copyright © 2003 Pearson Education, Inc. Slide 6–9
Explaining Central Bank Behavior
• Theory of Bureaucratic Behavior
1. Is an example of principal-agent problem
2. Bureaucracy often acts in own interest
• Implications for Central Bank Behavior
1. Act to preserve independence
2. Try to avoid controversy—often plays games
3. Seek additional power over banks
Copyright © 2003 Pearson Education, Inc. Slide 6–10
Explaining Central Bank Behavior
• Should Fed be independent?
• Case for1. Independent Fed likely has longer run objectives,
politicians don't—evidence is that get better policy outcomes
2. Avoids political business cycle
3. Less likely budget deficits will be inflationary
Copyright © 2003 Pearson Education, Inc. Slide 6–11
Explaining Central Bank Behavior
• Case against1. Fed may not be accountable
2. Hinders coordination of monetary and fiscal policy
3. Fed has often performed badly
Copyright © 2003 Pearson Education, Inc. Slide 6–12
Figure 6-4: Central Bank Independence and Macroeconomic Performance in 17 Countries