Chapter 14 Central Banks

Case against independence

-Proponents of a Fed under the control of the president or Congress argue that it is undemocratic to have monetary policy (which affects almost everyone in the economy) controlled by an elite group that is responsible to no one • Undemocratic • Unaccountable • Difficult to coordinate fiscal and monetary policy • Has not used its independence successfully

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as done in other countries?

12 Regional Federal Reserve banks were set up to diffuse power among banks due to hostility of Americans with central banks and authority.

Who controls the budget for the Fed?

Board of Governors

Should central banks be privately or publicly owned? Explain.

Central bank should be publicly owned because they are more transparent and have a better interest in the public. Privately owned banks could be easily influenced by the owners to act in their own interest.

In what ways can the national central banks influence the conduct of monetary policy?

Central banks are able to clear checks, increase or decrease money supply by selling gov bonds.

FRB

Federal Reserve Board of Governors •Part of the fed system •Assumes regulatory and supervisory of member banks. •14 year non renewable term

How would you argue in favor of the current trend toward central banks' independence?

If central banks have their independence then they won't be politically influenced. This will reduce/prevent inflationary pressure.

Central Banks

government authorities in charge of monetary policy

theory of bureaucratic behavior

objective is to maximize its own welfare which is related to power and prestige

Case for Independence of the Fed

• So central banks aren't influenced by political pressure. •Political pressure would impart an inflationary bias to monetary policy

Functions of the Federal Reserve

•Clear Checks •Issue new currency •Remove damaged currency •Administer and make discount loans •administer mergers

FOMC

•Federal Open Market Committee • Decide interest rates and monetary policy. • 12 Member: -7 of FRB -Pres. of Fed of NY -4 Regional reserve bank presidents

The Fed

•Federal Reserve System • Privately owned by member banks •12 Regional banks

Central Bank Behavior

•public interest view - serves the public interest •Theory of bureaucratic behavior