Members of the Executive Board have long terms
Determines own budget
Less goal independent
Price stability (the only mandated goal; no other)
Charter cannot by changed by legislation; only by revision of the Maastricht Treaty
*Structure and Independence of Other Foreign Central Banks
Bank of Canada
Essentially controls monetary policy
Bank of England (UK)
Has some instrument independence.
Bank of Japan
Recently (1998) gained more independence
The trend toward greater CB independence is World-wide
*The Case FOR giving Central Banks More Independence
Political pressure would impart an inflationary bias to monetary policy
Political business cycle
Could be used to facilitate Treasury financing of large budget deficits: accommodation
Too important to leave to politiciansthe principal-agent problem is worse for politicians
*The Case AGAINST giving Central Banks more Independence:
Undemocratic (sovereign countries and electorates lose power)
Unaccountable (no need to face elections for politicians who have no power either)
Difficult to coordinate fiscal and monetary policy (we see this in the 2011 Eurodebt crisis)
Has not used its independence successfully (only inflation controlled, little else achieved). It is part of the problem in 2011 since it cannot act as many argue is necessary (lender of last resort) to preserve future of the common currency.
*Central Bank Behavior
Theory of bureaucratic behavior: objective is to maximize its own welfare which is related to power and prestige
Fight vigorously to preserve autonomy
Avoid conflict with more powerful groups
Does not rule out altruism
Other Theories: Assuming more political control can vary depending on the nature of national political systems.
KEY IDEAS for Chapters in Book for Students to focus on for Learning & exams
Mishkin, 8th edition, Money, Banking and Financial Markets, 2007
(but, with some comments by Rock and from the lectures and also some of Mishkins new greater attention to the real world events and research that has changed some of the treatments in the 9th Edition (2010
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Ch13 (8th ed.) The Central Bank (FED) Balance Sheet; and the MONEY SUPPLY PROCESS (and adjusting money supply)
- Read only material on pages 333-341 and the summary 347-348;
-Do not read the rest of the chapter (you have seen it before in macro classes about money creation via banking system and money multiplier);
AND
Ch.14 (8th ed.) DETERMINANTS of the MONEY SUPPLY
-Do not read any of this chapter. Most of it you have seen before in macro and the rest is not important for this class (and in current crisis the money supply and relation to inflation is of minimal importance at global levelalthough an issue in some countries with higher rates of growth)
--(Note: In the 9th edition, these two chapters were combined into one chapter became chapter 14 Mish9ed_c14...)
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--(Note: The corresponding chapter in the Mish. 6ed Study Guide is Ch.14)
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NOTES Chapter 13:
*Note: The money supply is important for some economists (very important for many more conservative ones) since it is seen as a key and fundamental variable that allows market capitalism to work well. It is also seen to be linked tightly (the cause of the effect of inflation always) to price inflation.
This is why so much time is spent on money supply in many macro courses.
*Not all economists agree with this level of importance of money supply (Disclosure: Rock is one of these skeptics about its crucial importance and thinks it is of mainly secondary importance except in times of rapid inflationary rises or when a full employment (social democratic real economy policy) policy is one of the most important (or 1st of all) primary goals of policy makers.
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p.333
* Players in the Money Supply Process
---Central bank (Federal Reserve System) {The most important player)
---Banks (depository institutions; financial intermediaries)
---Depositors (individuals and institutions)
---Borrowers (individuals and institutions; sellers of bonds bought by banks)
p.334f
* Feds (U.S. Central Banks) Balance Sheet (Need to understand this to see how Fed affects money supply in the rest of economy):
--Monetary Liabilities
------Currency in circulation: in the hands of the public
------Reserves: bank deposits at the Fed and vault cash (required & excess reserves)
-- Assets
------ Government securities: holdings by the Fed that affect money supply and earn interest
------ Discount loans: provide reserves to banks and earn the discount rate
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pp.336-339
*Open Market Operations of FED = (Buy/Sell) Bonds from Public
--Affects the monetary base and sometimes reserves (and thus possibly the lending behavior of banking system)
Open Market Purchase: Summary
--The effect of an open market purchase on reserves depends on whether the seller of the bonds keeps the proceeds from the sale in currency or in deposits
--The effect of an open market purchase on the monetary base always increases the monetary base by the amount of the purchase
Open Market Sale
--Reduces the monetary base by the amount of the sale
--Reserves remain unchanged
--The effect of open market operations on the monetary base is much more certain than the effect on reserves
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p.339-340
The public moves Bank Deposits into Currency and holds it:
--Then the monetary base is unaffected, but the reserves decrease one-for-one
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p.340f
