Chapter 12: Structure of Central Banks and the Federal Reserve System

Structure of the Federal Reserve System
1. Diffusion of power: the Fed Reserve banks, Board of Governors of the Federal Reserve System, Federal Open Market Comittee (FOMC), Fed Advisory Council and member commercial banks.
2. Federal Reserve Banks: for 12 district; largest are New York, Chicago, and SF
-quasi-public (part private, part government)
-each with nine directors who appoint president and other officers of the FRB
-The twleve Fed Reserve banks perform the following functions:
a. clear checks, issue new currency, withdraw damaged currency, administer and make discount loans to banks, evaluate mergers, liaisons between the business communitry and FRS, examine bank holding companies and state-chartered member banks, collect data, use staffs of prof economists to research topics related to monetary policy.
-Involved in monetary policy:
a. establish discount rate; which banks can obtain discount loans; directors select banker to serve on Fed Advisory Council; 5 of 12 presidents have vote in the FOMC
3. Special role of the FRB of NY
-contains many large banks in the US; bond and foreign exchange markets; only FRB to be a member of the Bank for International Settlements (BIS); president is the only permanent member of FOMC serving as vice-chairman of the committee.

Member Banks
1. all national banks are members of Fed Reserve System; required all banks to have required reserves; all banks can borrow from fed

Board of Governors of the Fed Reserve System
1. seven members, including the chairman, appointed by the president of the US and confirmed by the Senate
2. head of the fed; monetary policy; FOMC; set reserve requirements; control discount rate; mergers; bank holding companies; supervises the activities of foreign banks in US

Federal Open Market Committee
1. influence money supply and interest rates
2. open market operations

The FOMC Meeting, Why the Chairman of the Board of Governors Really Runs the Show

How Independent is the Fed?
1. instrument iindependence: the ability of the central bank to set monetary policy instruments
2. Goal independence: the ability of central bank to set the goals of monetary policy
3. The fed has both types of independence
4. factor that contribue to independence: income from Fed
5. Congress can change fed structure; president can appoint governors

Structure and Independence of the European Central Bank
1. conducts monetary policy for countries that are members of the European Monetary Union
2. The central banks for each country has similar role to that of the Federal Reserve Banks

Differences Between the European System of Central Banks and the Federal Reserve System
1. budgets of fed controlled by board of governors, while national central banks control their own budgets and the budget of the ECB in Frankfurt; ECB has less power than does the BoG
2. monetary operations of teh ECB are conducted by the NCB in each country so monetary operations are not centralized as Fed.
3. ECB not involved in supervision and regulation of financial institutions

Governing Council
1. concensus but no votes; fed releases statement of fomc; ECB have news conference

How independent is the ECB?
1. most independent central bank in the world; long-term goal is price stability
2. ecb's charter cannot be changed by legislation

Structure and independence of other foreign central banks
1. Bank of Canada
-gave monetary policy to the government; on paper, BoC is not as instrument-independent as the fed.; in practice, does control monetary policy
-goal for monetary policy, a target for inflation, is set jointly by the bank of canada an the government so the bank of canada has less goal independence than the fed.

2. Bank of England
-least independent of the central banks because the decision to raise or lower interest rates is controlled by the chancellor
-makes it monetary policy independently from the ECB.
-inflation target is set by chancellor so less goal-independent than fed

3. Bank of Japan
-price stability, granted greater instrument and goal independence
-Ministry of Finance has control over budget --> limit independence

4. The trend toward greater independence
-greater independence produce better monetary policy

Explaining central bank behavior
1. factor affecting central bank behavior is its attempt to increase its power and prestige
2. fed maintain autonomy; avoid conflict with powerful groups
3. hide actions from public and politicians to avoid conflicts with them

Should the fed be independent?
1. favor
-inflationary bias to monetary policy; politicians are short-sighted; politically insulated fed is more likely to be concerned with long-run objectives
-political business cycle: just before election, expansionary policies are pursued to lower unemployment and interest rates.

2. against
-undemocratic to have monetary policy controlled by elite troup that is responsible to no one.; lack of accountability; only by placing monetary policy under the control of politicians who also control fiscal policy can these two policies be prevented from working at cross-purposes.
-fed has not always used its greedom sucessfully.