Title: Benefits of a Common Currency
1Benefits 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
2Benefits 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
3Benefits 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
4Benefits 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)
5Benefits 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
6Benefits 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
7Benefits 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
8Benefits 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)
9Costs and Benefits Compared
10Costs 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
11Monetarist View
12Keynesian 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
13Keynesian View
14Monetarist View and Keynesian View Compared
- The monetarist view has been in favor with
economists since the early 1980s
15Is the EU an OCA?
16Is 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
17Price 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
18Price 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
19Asymmetric 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
20Asymmetric Shocks (cont.)
21Asymmetric 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)
22Is 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
23Labor 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
24Costs and Benefits in the Long Run
25Costs and Benefits in the Long Run (cont.)
13
26The 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)
27The 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
28The 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
29The 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
30Conclusions
- 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
31European 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
32European 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
33European 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
34European 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
35European 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
36European 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
37European 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
38European 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?
39European 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
40European 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
41European Central Bank (cont.)
42European 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
43European 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
44European 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
45European 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.
46The 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 -
47The Federal Reserve System Districts
48European 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
49European 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
50European 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
51European 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)
52European 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
53European Central Bank (cont.)
- Governing Council
- 6 members of the Executive Board
- Governors of the 16 NCBs
54Members of Euroland
- Austria
- Belgium
- Cyprus
- Finland
- France
- Germany
- Greece
- Ireland
- Italy
- Luxembourg
- Malta
- Netherlands
- Portugal
- Slovakia
- Slovenia
- Spain
55European 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
56European Central Bank
57European 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
58European 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
59European 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
60European 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
61European 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
62European 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
63European 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
64Mergers and Acquisitions in the EU Banking Sector
65(No Transcript)
66Example 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,...)
67Example 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
68Example 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
69Example 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)
70Conclusion
- 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
71Turkish 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
72The 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
73TCMB
- 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
74TCMB
- 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
75TCMB
- 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
76TCMB
- 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
77TCMB
- 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
78TCMB
- 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)
79Political 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
80Political 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)
81Political 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
82Institutional Structure of the TCMB
83TCMB
- 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
84Aims of the TCMB
85TCMB
- 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.
86TCMB
- 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
87TCMB
- 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