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Benefits of a Common Currency

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Title: Benefits of a Common Currency


1
Benefits of a Common Currency
  • Costs have to do with macroeconomic management of
    the economy
  • Benefits have to do with the microeconomic aspect
  • Eliminating national currencies for a common
    currency leads to economic efficiency gains
  • Elimination of transaction costs
  • Elimination of exchange rate risk

2
Benefits of a Common Currency (cont.)
  • Direct gains from the elimination of transaction
    costs
  • Eliminating the costs of exchanging one currency
    into another is themost visible gain from a
    monetary union
  • E.C. Estimates these gains between 13-20
    billion/year
  • Of course banks will lose revenue they get for
    exchanging national currencies in a monetary union

3
Benefits of a Common Currency (cont.)
  • Indirect gains from the elimination of
    transaction costs
  • The scope for price discrimination between
    national markets will be reduced
  • (TABLE HERE)
  • The unification of currency along with the other
    measures in creating a single market will make
    price discrimination more difficult
  • This is a benefit to the European consumer

4
Benefits of a Common Currency (cont.)
  • Welfare gains from less uncertainty
  • The uncertainty about future exchange rate
    cahnges introduces uncertainty about future firm
    revenues
  • Welfare of firms will increase when common
    currency is introduced (exception firms taht
    make money by taking on risk)

5
Benefits of a Common Currency (cont.)
  • Exchange Rate Uncertainty and the Price Mechanism
  • Exchange rate uncertainty introduces uncertainty
    about the future prices of goods and services
  • Movement towards a common currency will eliminate
    the exchange risk and lead to a more efficient
    working of the price mechanism

6
Benefits of a Common Currency (cont.)
  • Exchange Rate Uncertainty and Economic Growth
  • The elimination of the exchange risk will lead to
    an increase in economic growth (the EC argument)
  • However, this view lacks empirical data

7
Benefits of a Common Currency (cont.)
  • Benefits of An International Currency
  • When countries form a monetary union the new
    currency will likely weigh more in international
    monetary relations than the sum of individual
    currencies prior to the Union
  • The currency is likely to find use outside of the
    union
  • This creates additional benefits to the union
  • Issuer of currency obtains additional revenues
  • It will boost activity for domestic financial
    markets (foreign residents will want to invest
    this creates know-how and jobs financial
    institutions will have new opportunities

8
Benefits of a Common Currency (cont.)
  • Benefits of a Monetary Union and the Openness of
    Countries
  • The welfare gains of a monetary union are likely
    to increase with the degree of openness of an
    economy
  • Ex elimination of transaction costs will benefit
    those countries that buy and sell a large number
    of goods and services in foreign countries
  • With an increasing openness towards the other
    partners in the Union, the gains from a monetary
    union (per uniot of output increases)

9
Costs and Benefits Compared
10
Costs and Benefits Compared (cont.)
  • The importance of costs and benfits depends on
    ones view about the effectiveness of the exhange
    rate instrument
  • Monetarist View
  • Exchange rate changes are ineffective as
    instruments to correct for these different
    developments between countries
  • Even if they are effective they make countries
    worse off

11
Monetarist View
12
Keynesian View
  • The world is full of rigidities (wages and prices
    are rigid, labor is immobile) this makes the
    exchange rate a powerful instrument
  • Mundells original theory represents this very
    well
  • Few countries would benefit from a monetary union
  • Large countries with one currency would be better
    off (economically) splitting the country into
    different monetary zones

13
Keynesian View
14
Monetarist View and Keynesian View Compared
  • The monetarist view has been in favor with
    economists since the early 1980s

15
Is the EU an OCA?
16
Is the EU and OCA? (cont.)
  • Large differences in openness of EU countries
    with the rest of the Union
  • Cost-benefit graph will be different for each
    country
  • Most beneficial for the most open countries (ex.
    Benelux, Ireland)
  • For other countries like Italy with lower
    openness, their authorities obviously did not
    consider the loss of the exchange rate instrument
    costly and therefore decided to join the Union

17
Price and Wage Rigidities, Labor Mobility and
Monetary Union
  • Cost-Benefit calculus of a monetary union is also
    influenced by the degree of wage and price
    rigidities

18
Price and Wage Rigidities, Labor Mobility and
Monetary Union (cont.)
  • An increase in the degree of mobility of labor
    shifts the cost curve to the left and makes the
    monetary union more attractive
  • Single market with labor mobility makes the EMU
    more attractive
  • However, regional concentration of industrial
    activities (like that of auto production in one
    country) would shift the cost curve upwards

19
Asymmetric Shocks and Labor Market Flexibility
  • The size and frequency of asymmetric shocks also
    matters for the attractivenss of a monetary union
  • Countries that have very different demand and
    supply shocks will find it more costly to join a
    monetary union
  • Their cost line would shift upwards

20
Asymmetric Shocks (cont.)
21
Asymmetric Shocks (cont.)
  • Countries (regions) that experience a high
    divergence in output and employment growth need a
    lot of flexibility in their labor markets if they
    want to benefit from a monetary union
  • As the degree of divergence goes up the greater
    the need for flexibility in labor markets
  • This relationship is shown by the line AA
  • Empirically, EU-15 (and EU-27) as a whole is
    located above the AA line from an economic
    point of view, a monetary union is a bad idea
  • However, there is a subset of countries which do
    form an OCA (EU-5 Benelux, Germany and France)

22
Is the EU an OCA?
  • The challenge for the EU is to move to the other
    side of the AA line
  • Two strategies
  • Reduce the degree of real divergence
  • Difficulty dependent on factors over which
    policy-makers have little influence (ex
    industrial specialization)
  • Increase the degree of flexibility
  • Requires reform of labor market institutions
    (difficult but necessary)
  • However, by moving towards closer political
    unification asymmetric shocks could be reduced

23
Labor Unions and Monetary Union
  • Role of labor unions in determining the cost of a
    monetary union is significant
  • Presence of asymmetric shocks
  • wages shoudl be flexible
  • Centralized wage bargaining harmful
  • ex German unification (E. German firms did not
    survive the shock of unification)
  • Presence of symmetric shocks
  • Wages should be more uniform across countries
  • Wage bargaining is still not desirable because
  • Asymmetric shocks less likely in unified Europe
    but regional specializaiton could lead to
    asymmetries
  • Uneven changes in output and employment between
    sectors (sectors with less favorable developments
    would suffer)
  • Future organization of labor unions in a monetary
    union will have to respect the requirements of
    flexibility

24
Costs and Benefits in the Long Run
25
Costs and Benefits in the Long Run (cont.)
13
26
The Challenge of Enlargement of EMU
  • Since Eurozone is in existence the question of
    whether or not it is optimal is academic
  • Still important to know, however, whether or not
    the beneifts of the union exceed the costs for
    the 15 members
  • If costs do not exceed benefits individual
    members will be quite unhappy with the ECB
  • Enlargement of the EMU may exacerbate problems of
    ECB
  • Present Eurozone consists of 16 members
  • Austria, Belgium, Finland, France, Germany,
    Ireland, Italy, Luxembourg, Netherlands,
    Portugal, Spain (1999)
  • Greece (2001) Slovenia (2007) Cyprus, Malta
    (2008), Slovakia (2009)

27
The Challenge of the Enlargement of the EMU
(cont.)
  • Denmark, Sweden and the UK have not yet joined
    the EMU
  • Will all of these countries bring the enlarged
    Eurozone closer to an optimal currency area?
  • Degree of Openness
  • Central European countries are at least as open
    towards the EU as the EU countries themselves
  • Central European countries appear to be more
    integrated with the EU than Denmark, Sweden and
    the UK
  • Thus, in terms of openness, the Central European
    countries would fit quite well into the existing
    EMU

28
The Challenge of the Enlargement of the EMU
(cont.)
  • Asymmetry of Shocks
  • Study of Korhonen and Fidrmuc (2001) analyzed the
    correlation of demand and supply shocks with the
    average of the union for the EU states and
    candidates
  • Study finds high correlations of the large
    coutnries (France, Italy and Germany) with the
    euro area
  • Not surprising since these large coutnries make
    up a significant part of the Union
  • Although some Central European countries (Hungary
    and Estonia) are well correlated with the euro
    area, this is much less the case with others
  • A large number of states have negative
    correlations of their demand shocks (Lithuania,
    Latvia, Czech Republic, Slovenia and Slovakia)
  • This could be because these states pursue
    independent monetary policies once in the Union
    this source of asymmetric shocks will dissapear
  • But the supply shock negative correlation is
    unlikely to disappear

29
The Challenge of the Enlargement of the EMU
(cont.)
  • The position of the UK
  • Correlation of demand shock is also negative
    this reflects UKs pursuit of its own national
    monetary policies quite independently from what
    happens in the Euro area
  • Correlation of the supply shock is also quite low
  • Conclusions
  • It is not clear that all countries in the sample
    are part of an OCA with the rest of the EU
  • (most evident for the UK) low trade with the
    euro area and is more subjected to asymmetric
    shocks than other large members of the Union
    hesitation of the UK to enter the EMU is
    understandable
  • Despite the openness of the Central European
    states to the EU many of these countries are
    still subjected to relatively large asymmetric
    shocks
  • Some of these countries may still enter the EMU
    however as the best possible way to import
    monetary and price stability

30
Conclusions
  • It is unlikely that the EU as a whole constitutes
    an OCA
  • The number of countries that benefit from
    monetary union is probably larger than most
    economists thought just a few years ago
  • As the years increase, monetary union will become
    a more attractive option for most, if not all EU
    countries
  • Even the countries that are net gainers from a
    monetary union take a risk by joining the union
  • When large shocks occur they will find it more
    difficult to adjust

31
European Central Bank
  • In the postwar period 2 models of central banking
    have evolved
  • Anglo-French model
  • Objectives
  • Central banks pursue several objectives
  • Price stabilization
  • Stabilization of the business cycle
  • Maintenance of high employment
  • Financial stability
  • Institutional Design
  • Political dependence of central bank
  • Monetary decisions are subject to the governments
    approval
  • German model
  • Objectives
  • Only one objective Price Stability
  • Institutional Design
  • Political Independence no interference from
    political authorities

32
European Central Bank (cont.)
  • When the European nations negotiated the
    Maastricht Treaty a choice between these two
    models had to be made and the German model
    prevailed as the choice for the ECB
  • ECB objectives
  • Article 105 of Maastricht Treaty states that it
    is price stability
  • Article 2 includes a high level of employment
  • Treaty recognizes the need to follow other
    objectives as well, but they are seen as
    secondary to price stability
  • Treaty is also clear on the need for political
    independence of the ECB
  • In the absence of this independence the central
    bank can be forced to print money to cover
    deficits this would lead to inflation

33
European Central Bank (cont.)
  • The Bundesbank is clearly the model for the ECB,
    however, the ECB is tougher on inflation and
    political inflation than the Bundesbank was
  • Reason a simple majority in German parliament
    can change the status of the Bundesbank, changes
    in the ECB are much more difficult
  • They can only occur by a revision of the
    Maastricht Treaty requiring unanimity among all
    EU-member states, including those that are not
    members of EMU

34
European Central Bank (cont.)
  • The success of the German model is intriguing
  • When the EU countries negotiated the Maastricht
    Treaty, the Anglo-French model prevailed in
    almost all of the EU-member states
  • It was rejected for the German model because
  • Intellectual Development
  • The reaction to Keynes the monetarist view
    erupted
  • It was felt that unemployment could not be
    lowered below its natural rate without creating
    inflation
  • Lowering unemployment below natural rate could
    only be achieved with structural policies like
    more flexibility in labor aned lower taxes
  • The central banks should only concentrate on what
    they can control PRICES
  • It was demonstrated taht countries whose central
    banks were politically independent managed their
    economies better (lower inflation without high
    unemployment or lower growth

35
European Central Bank (cont.)
  • Strategic Position of Germany in the EMU Process
  • Germany faced the risk of having to accept higher
    inflation when they entered a monetary union
  • In order to reduce this risk they insisted on
    creating a central bank tough on inflation
  • In order to accept the EMU Germany insisted on
    having an ECB like the Bundesbank

36
European Central Bank (cont.)
  • ECB was thus modelled on the German Bundesbank
    with a strong mandate for price stability and
    weak responsibility for stabilizing output and
    employment functions
  • conservative central bank an institution that
    attaches greater weight to price stability and
    lesser weight to output and employment
    stabilization than the rest of society

37
European Central Bank (cont.)
  • This leads to a conflict
  • In hard times such as an unexpected recession
    taht increases unemployment the ECB will do
    little in terms of expansionary policies or less
    than what the society wants it to do
  • This represents a conflict between the ECB and
    elected politicians who represent the society
  • ECB will argue this gives them greater
    credibility because of their reluctance to yield
    to political pressure
  • This leads to a trade-off between credibility and
    stabilization

38
European Central Bank (cont.)
  • For the ECB monetary policies should not be used
    to lower unemployment below the natural
    unemployment
  • Politicians should do this by lowering taxes on
    labor and introducing flexibility in the labor
    market
  • The question and the problem is WHAT DOES THE
    ECB SEE AS THE NATURAL UNEMPLOYMENT RATE? and is
    it correct in its assesment?

39
European Central Bank (cont.)
  • The Maastricht Treaty gave a mandate to the ECB
    to maintain price stability but also stabilize
    output and employment (provided this does not
    endanger price stability)
  • A wall was erected around the ECB to protect it
    from political interference so it could
    accomplish these objectives
  • Although there are good reasons for independence
    there are also problems associated with it
    mainly, its lack of accountability
  • It is possible for the ECB to make a mistake, for
    ex to miscalculate the natural unemployment rate
    and therefore fail to stabilize output and
    employment while it could do so without
    endangering price stability

40
European Central Bank (cont.)
  • There needs to be a mechanism to check that the
    ECB fulfills its mandate and applies sanctions if
    this is not the case
  • If the government decided about interest rates
    there would be no need for accountability of the
    central bank
  • If the central bank has lots of power then there
    is a corresponding need for accountability since
    the government is accountable to the voters
  • Independence and accountability are part of the
    delagation of powers granted by voters

41
European Central Bank (cont.)
42
European Central Bank (cont.)
  • Does the ECB have the strongest degree of
    accountability?
  • Evidence suggests taht it is less well developed
    than that of the Federal Reserve Banking System
    of the USA (the Fed)
  • Although both presidents of these two banks face
    the parliament regularly the chairman of the Fed
    faces an institution that can change the status
    of the Fed by a simple majority therefore he
    needs to pay attention to the opinions of
    Congressmen

43
European Central Bank (cont.)
  • When the president of the ECB appears before
    parliament they have no power to change its
    status it can only be changed by changing the
    Treaty requiring a unanimity of all EU states
    ECB has much more power
  • Thus ECB has lots of independence but not a
    corresponding degree of accountability

44
European Central Bank (cont.)
  • The other issue of accountability rises from the
    ECBs objectives they are not clearly defined
  • Although price stability is given as its
    objective it was not given a precise content
    making it possible for the ECB to define it
    itself
  • The other objectives of the ECB (provided price
    stability is achieved) have been left very vague
  • If this strategy of the ECB is successful it will
    only really be responsible for its performance
    against inflation

45
European Central Bank (cont.)
  • For ex. The Fed is responsible for movements in
    employment, mandated by law unlike the ECB
    the Fed has greater responsibility
  • The primary responsibilities of the Fed
  • conducting the nations monetary policy to help
    maintain employment, keep prices stable, and keep
    interest rates relatively low
  • supervising and regulating banking institutions
    to make sure they are safe places for people to
    keep their money and to protect consumers credit
    rights.
  • providing financial services to depository
    institutions, the U.S. government, and foreign
    central banks, including playing a major role in
    clearing checks, processing electronic payments,
    and distributing coin and paper money to the
    nation's banks, credit unions, savings and loan
    associations, and savings banks.

46
The Federal Reserve System
  • The central bank of the United States
  • Created by Congress in 1913
  • Consists of a network of twelve Federal Reserve
    Banks and a number of branches under the general
    oversight of the Board of Governors. The Reserve
    Banks are the operating arms of the central bank

47
The Federal Reserve System Districts
48
European Central Bank
  • In summary the accountability of the ECB is weak
  • Absence of strong political institutions in
    Europe capable of exerting control over its
    performance
  • As a result of the Treatys vagueness in defining
    its objectives the ECB has restricted its area of
    responsibility to inflation

49
European Central Bank (cont.)
  • This creates a long-term problem for the
    political support of the ECB
  • Most central banks are responsible for
    macroeconomic stability reducing business cycle
    fluctuations, avoiding deflation, managing
    financial stability,...
  • Difficult to see how European politicians will
    continue to support an institution to which great
    power has been delegated and over which they have
    so little control

50
European Central Bank (cont.)
  • Some things the ECB can do to avoid this
  • To compensate for the lack of formal
    accoutnability it could enahnce informal
    accountability, ex. Have greater transparency
    (for ex the ECB can inform the public about its
    objectives and how it will achieve them and
    openness in the decision-making process
  • The ECB has tried to do this with its monthly
    reports and press conferences by the ECB
    president
  • Publish the minutes of its meeting like th eFed
    showing the voting of members but the ECB says
    it cannot due to an article in the Treaty that
    prohibits it from doing so
  • ECB could broaden its responsibility
  • ECB should announce its estimate for the natural
    unemployment rate giving the public something to
    measure it by

51
European Central Bank (cont.)
  • Institutional Framework of the ECB
  • The continuing importance of nation-states in the
    EU made it necessary to construct monetary
    institutions for Euroland that are sufficiently
    decentralized and yet maintain unity in the
    conduct of monetary policy
  • The institutions of Euroland were established in
    the Maastricht Treaty.
  • Monetary policy is entrusted to the Eurosystem
    which consists of
  • ECB
  • National Central Banks (NCBs) of the EU countries
    in the EMU (in 2009 there are 16)

52
European Central Bank (cont.)
  • The governing bodies of the Eurosystem are
  • Executive Board
  • President (Jean-Claude Trichet, France)
  • Vice-President (Lucas D. Papademos, Greece)
  • 4 Directors of ECB
  • Lorenzo Bini Smaghi, Italy
  • Jose Manuel Gonzalez-Paremo, Spain
  • Jürgen Stark, Germany
  • Gertrude Tumpel-Gugerell, Austria

53
European Central Bank (cont.)
  • Governing Council
  • 6 members of the Executive Board
  • Governors of the 16 NCBs

54
Members of Euroland
  1. Austria
  2. Belgium
  3. Cyprus
  4. Finland
  5. France
  6. Germany
  7. Greece
  8. Ireland
  • Italy
  • Luxembourg
  • Malta
  • Netherlands
  • Portugal
  • Slovakia
  • Slovenia
  • Spain

55
European Central Bank (cont.)
  • Governing Council
  • Main decision-making body of the Eurosystem
  • It formulates monetary policies and takes
    decisions concerning interest rates, reserve
    requirements and the provision of liquidity
  • Meets every 2 weeks in Frankfurt
  • Each of the 20 members has one vote
  • Executive board implements the monetary policy
    decisions of the Governing Council
  • Gives instructions to the NCBs
  • Sets agenda for the meetings of the Governing
    Council

56
European Central Bank
57
European Central Bank (cont.)
  • The whole decision-making structure is called the
    Eurosystem
  • ECB is only a part of this system and cannot take
    decisions on its own about monetary policies
  • The national banks are fully involved in the
    decision-making process
  • Decisions are then implemented by the ECB
  • NCBs then carry out the decisions in their own
    markets

58
European Central Bank (cont.)
  • The question is whether or not this system is too
    decentralized
  • The NCBs in the Governing Council have a clear
    majority (16 out of 20 members)
  • This contrasts with other decentralized central
    banks
  • For ex. The US Feds decision-making body is the
    Board of Governors
  • 12 members where 5 are presidents of regional
    banks (representing regional interests in
    minority position) the other 7 members are
    appointed by Congress to represent the interests
    of the system as a whole

59
European Central Bank (cont.)
  • The ECB is small (employee-wise) in contrast to
    the national banks
  • It is possible for the NCBs to analyze issues to
    their national advantage

Staff at ECB and NCBs Staff at ECB and NCBs Staff at ECB and NCBs
Total Staff In analytical functions (research, statistics, econ.)
ECB 600 100-150
Bundesbank 17,632 360
Banque de France 16,917 750
Banca dItalia 9,307 300
Banco de Espana 3,269 350
Nederlandsche Bank 1,721 165
Note NCB data refers to 1995 Note NCB data refers to 1995 Note NCB data refers to 1995
60
European Central Bank (cont.)
  • However, this should not be exaggerated
  • In a recent study DeGrauwe et al concluded that
    in case of an asymmetric shock even if all the
    NCBs acted in their own national interest, as
    long as the Executive Board took a Euroland
    perspective, the outcome would not be biased in
    favor of one country or another
  • Even though the Executive Board has minority
    voting since the NCBs will want different things
    the Executive Board ends up with the majority
  • This may not always be the case if the different
    governors end up in coalitions

61
European Central Bank (cont.)
  • One of the most peculiar features of Eurolands
    monetary system is the fact that while monetary
    policy was entrusted to a European institution,
    the responsibility for banking supervision was
    kept firmly in the hands of nation states
  • This could lead to problems

62
European Central Bank (cont.)
  • Bank Regulation and Supervision were set out in
    an EC Directive prior to the signing of the
    Maastricht Treaty
  • Responsibility for the supervision of banks
    entrusted to the authorities of the coutnry where
    the banks have their head office
  • The principle of home country control
  • Ex. Deutsche Bank is supervised by the German
    supervisory authority
  • This also means Germany is responsible for
    supervising the Deutsche Bank branches in other
    countries

63
European Central Bank (cont.)
  • Host Country is responsible for financial
    stability in its own market
  • host country responsibility
  • Ex. France is responsible for stability of all
    banks in France (including foreign ones)
  • As long as the national banks remain within
    national borders there is not much of a problem
  • However, the degree of segmentation in the
    banking sector is very large
  • The cross-border MA activity is expected to
    increase

64
Mergers and Acquisitions in the EU Banking Sector
65
(No Transcript)
66
Example of Banking Crisis
  • Example of a possible crisis
  • It is possible that in the near future 50 or
    more of the banks operating in Italy will be
    branches of banks from another country (ex.
    Germany, France,...)
  • The Italian monetary authorities will be
    responsible for the stability of the banking
    sector in Italy and will need information on the
    soundness of these banks and will need to acquire
    this informaiton from supervisory institutions in
    the other country (Germany, France,...)

67
Example of Banking Crisis (cont.)
  • Will this information be provided in a timely
    manner?
  • Will all necessary information be disclosed?
    (Most countries do not like to give out negative
    information on their banks)
  • It is possible that Italy will be badly informed
    and this will make it more difficult for Italy to
    provide the stability it is supposed to
  • Problem could be worse in a crisis

68
Example of Banking Crisis (cont.)
  • Ex. Banking crisis happens in Italy and Italy
    needs to bail out good banks that are in a
    liquidity crisis (lender of last resort) and
    needs quick information
  • If it does not get this information quickly it
    may hesitate to lend to a good bank
  • The crisis will get worse
  • The ECB needs to take over this lender of last
    resort function to prevent banking crises

69
Example of Banking Crisis (cont.)
  • Banking Crisis
  • Failure of a bank with bad loans, a run on other
    sound banks by deposit-holders threatening the
    closure of these banks as well
  • Lender of Last Resort
  • Walter Bagehot (famous 19th century English
    economist) defined the principles that central
    banks should follow to prevent a banking crisis
  • The central bank should lend without limits to
    sound but illiquid banks (lender of last resort)
  • The insolvent banks should either be allowed to
    fail or should be restructured whereby the bad
    loans are taken out of the failing bank and the
    remaining sound portfolio is placed in a new and
    recapitulated bank (usually the taxpayer will
    foot such a bill)

70
Conclusion
  • Eurosystem is unique
  • Compromise between national banks and unified
    decision-making
  • Its shortcomings
  • Lack of accountability
  • The decentralization of the ECB making it
    difficult for supervision to prevent and manage
    financial crises

71
Turkish Central Bank (TCMB)
  • Lesson will seek to answer the following
    questions
  • When was the TCMB formed
  • How was the TCMB formed
  • Why was the TCMB formed

72
The Birth of the TCMB
  • Central Banking born out of need to provide war
    financing in many states
  • The central bank of the Ottoman State was born
    due to similar reasons however it was somewhat
    different in institutional and ownership status
  • The Crimean War of 1853 was the beginning of the
    financial bankruptcy of the Ottoman Empire
  • The Ottoman State attempted to finance the war
    with domestic and foreign borrowing

73
TCMB
  • This led to the first foreign borrowing of the
    Ottoman Empire
  • 1854 the Ottoman Treasury sought long term debt
    in the European financial markets of London,
    Paris and Vienna
  • 1863 Osmanli Bankasi (Bank-i Osmani-i Sahane)
    formed by British and French capital to aid in
    Ottoman debt repayment
  • The Bank had the right and monopoly to print money

74
TCMB
  • The Bank would borrow at low interest in the
    European markets and increase its gold reserves
    and print three times the amount of its reserves
    and give the government capital advances in
    exchange for interest
  • Although the Bank operated with profit, the
    Ottoman state was not allowed to share in the
    profit
  • 1875 the Ottoman state declared that it would
    default on foreign debt
  • 1881 Düyun-i Umumiye Idaresi (Debt Management
    Administration) formed with the duty of managing
    the Ottoman states foreign debt

75
TCMB
  • The formation of the Duyun-i Umumiye Idaresi
    signaled the symbolic end of the Ottoman state
  • This trauma helped shape the economic politics of
    the new Turkish republic in 1923
  • i.e. Avoidance of foreign debt and budget
    deficits
  • These concepts also influenced the institutional
    structure of the central bank during 1930-1950

76
TCMB
  • The absence of a national central bank as the
    symbol of economic independence became a major
    problem of the Ankara government especially
    during the War of Independence
  • Problems created by this deficiency
  • The rejection of the Ottoman bank formed by
    foreign capital to provide war financing during
    WWI
  • High inflation and the havoc it brought on
    society
  • The constant depreciation of the Turkish Lira
  • 1925-1930 the ideological foundations of a new
    central bank for the new Turkish state planted

77
TCMB
  • The endeavor to create the central bank brought
    about restlessness in the two major banks, Is
    Bankasi and Osmanli Bankasi
  • Türkiye Is Bankasi supported the creation of the
    new institution
  • The General Manager of Is Bankasi, Celal Bayar,
    declared that he was ready to turn Is Bankasi
    into the new central bank
  • Osmanli Bankasi, opposed the new institution
    because it did not want to lose its privileges in
    printing money and stated that the new
    institution should be formed with foreign capital
    and that the new state should provide its
    financial stability with foreign borrowing

78
TCMB
  • Osmanli Bankasis wishes would have led the new
    state to lose its economic independence
  • The new leaders of the Republic decided to repay
    the Duyum-i Umumiye debt without foreign
    borrowing
  • This allowed for the new central bank to replace
    the Osmanli Bankasi which lost its priveleged
    status
  • 1930 the Central Bank Law passed in the Turkish
    Parliament
  • The new institution took over the governments
    domestic and foreign exchange and treasury
    operations
  • 3 October 1931 the Turkish Republic Central
    Bank (TCMB) formally began its operations as the
    38th central bank in the world
  • Other central banks formed after this period
  • New Zealand (1933) Canada (1934) Ireland
    (1943) Australia (1945)

79
Political Independence of the TCMB
  • 1930 the Governor of the Bank Council
    appointed for 5 years with the option of renewal
    by the President of the Republic
  • 1970 the law was changed to allow the upper
    level management to be appointed after the Bank
    Council declared the candidates and the Council
    decided on appointments
  • Today the Governor of the TCMB is appointed byt
    eh Cabinet of Ministers and the deputies are
    appointed from the Governors choice of 3
    candidates
  • Since the Governor and his deputies are not
    appointed at the same tme the government can
    shape the members of upper management

80
Political Independence
  • After 1987 elections the individual
    independence of the TCMB Governor was damaged
  • Governor and deputiess duty period reduced to 3
    years
  • 1990 Governors appointment period re-extended
    to 5 years
  • 2001 Governors appointment period re-extended
    to 5 years
  • Harmonization with European Central Banking
    System Law (ECBs president appointed for 8
    non-renewable years)

81
Political Independence
  • 1930 no specific education requirement for
    Governor and top 4 executives
  • 1970 mandate that Governor should have higher
    education with experience and knowledge in
    finance, economics and banking
  • Governor should have higher eduation in social
    sciences with previous experience in the public
    sector
  • Deputies should have an undergraduate or graduate
    degree in either law, finance, economics,
    management or banking along with adequate
    experience and knowledge and at least 10 years
    experience
  • Since 1970 the Banks Council is composed of 6
    people selected by the Governor and General
    Council of the Bank

82
Institutional Structure of the TCMB
83
TCMB
  • President of the TCMB
  • Durmus Yilmaz (since 18 April 2006) 61 y.o.,
    public sector experience since 1980, graduate
    degree in economics
  • Members of the Bank Council
  • M. Vehbi Çitak (since 1 May 2005) 50 y.o.,
    lawyer with graduate degree in social sciences
  • Doç. Dr. Lokman Gündüz (since 1 May 2005) 40
    y.o., PhD in banking
  • Prof. Dr. M. Ilker Parasiz (since 1 May 2003)
    65 y.o., PhD in law and economics
  • Necati Sahin (since 1 May 2004) 53 y.o.,
    undergraduate degree in economics
  • Prof. Dr. Necdet Sensoy (since 7 December 2006)
    54 y.o., PhD in accounting
  • Prof. Dr. Turalay Kenç (since 14 April 2009) 46
    y.o., PhD in economics

84
Aims of the TCMB
85
TCMB
  • The primary aim and priority of the TCMB pre-1986
    was to support the governments development
    program
  • With the changes in the foreign exchange and
    convertibility of the Turkish lira the aim of
    price stability became a major goal of the TCMB
  • Law No. 19126 of 3 June 1986
  • ekonomik gelismeye yardimci olmak amaciyla para
    ve kredi politikasini, kalkinma planlari ve
    yillik programlar göz önünde bulundurularak
    ekonominin gereklerine göre ve fiyat istikrarini
    saglayacak bir tarzda yürütmektir.

86
TCMB
  • 2001 new law lists the primary aim of the Bank
    as price stability
  • Provided that price stability is achieved the
    Bank can support the governments growth and
    employment policies
  • The Bank determines the inflation target with the
    government
  • Co-responsibility of the government and the
    Central Bank
  • The EU Progress reports criticize this aspect
    stating that it damages the independence of the
    Central Bank and does not conform to EU norms

87
TCMB
  • The government does not have power over the
    formation of the budget of the TCMB
  • However the government must approve the TCMBs
    budget
  • This limits the economic independence of the Bank
  • The TCMB can also be audited by the Prime
    Ministry
  • This is incompatible with the European Central
    Banking System norms
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