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FNCE 4070 Financial Markets and Institutions


FNCE 4070 Financial Markets and Institutions Lecture 7 Central Banking and the Conduct of Monetary Policy U.S. Economic Performance During the Early Fed Years ... – PowerPoint PPT presentation

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Title: FNCE 4070 Financial Markets and Institutions

FNCE 4070Financial Markets andInstitutions
  • Lecture 7
  • Central Banking and the Conduct of Monetary

What are These Central Banks and Who are These
Central Bankers?
Why Study Central Banking?
  • Answer Central bank actions have significant
    impacts on financial markets and specifically on
  • (1) interest rates (the cost of borrowing and the
    return on investing).
  • (2) financial asset prices (stocks, bonds,
    foreign exchange)
  • Thus we need to know something about central
  • How do central banks operate in financial
  • How can we monitor the potential for changes in
    central bank actions?
  • Understanding these issues will add to our
    understanding of (1) and (2) above.

Who Runs a Countrys Central Bank?
  • Central Banks may be either
  • (1) government owned and government controlled
  • (2) run under regulations that are specifically
    created to prevent extensive government
  • In most countries -- especially in the developing
    world -- the central bank is owned and controlled
    by the national government and, thus, has the
    potential for a minimal degree of autonomy from
    that government.
  • This situation, unfortunately, allows for the
    possibility of government interference in
    monetary policy.
  • As one example, the Central Bank of China, the
    People's Bank of China (PBOC) enjoys little
    operational independence.
  • Unlike Western central banks, the PBOC does not
    have the final word on adjusting interest rates
    or the value of the yuan. The basic course of
    monetary and currency policy is set by the State
    Council, China's cabinet, or by the Communist
    Party's ruling Politburo.

Central Banks in Major Countries
  • In the major countries of the world, however,
    central banks generally operate independent of
    their respective governments. Some of these
    banks are owned by their governments while others
    are not.
  • The Bank of England was nationalized in 1946
    however in 1997 it became an independent public
    organization, still wholly owned by the
    Government, but with independence in setting
    monetary policy to achieve government mandated
    inflation target.
  • The Federal Reserve, on the other hand, is
    owned by the 12 district banks and it is
    considered an independent central bank because
  • Its decisions do not have to be ratified by the
    President or anyone else in the executive or
    legislative branch of government,
  • It does not receive funding appropriated by
    Congress, and
  • The terms of the members of the Board of
    Governors span multiple presidential and
    congressional terms.

Reducing Government Control of Central Banks
  • Removing government control is designed to
    prevent political interference in the monetary
    policy process.
  • In reality, however, the degree of true
    independence, or separation from government
    involvement, varies even among these countries.
  • Some governments (e.g., the U.K., Australia, and
    Canada) are actively involved in setting specific
    inflation targets for their central banks.
  • Others such as the ECBs operate within an
    inflation target as implied in its original
  • The Federal Reserve is probably an example of a
    central bank with the greatest separation from
    government involvement.

Major Central Banks Independence
  • Central Bank (Date Founded) Date of Independence
  • Federal Reserve (1913) 1913
  • Bank of England (1694) 1997
  • Bank of Japan (1882) 1998
  • European Central Bank (1999) 1999
  • Recognized date of separation from government
  • Granted in the 1913 Federal Reserve Act.
  • Following the election of the new Labor
    Government in May 1997.
  • Under revisions to the Bank of Japan Law
  • As noted in the Maastricht Treaty (1993) and
    specified in the Banks charter.

Should Central Banks be Independent?
  • Over the years, there has been growing debate as
    to the most efficient and effective arrangement
    for central banks.
  • Case for Central Bank Independence
  • Independent Central Banks are more likely to have
    longer run objectives while politicians may have
    shorter term objectives.
  • Independence minimizes a political (i.e.,
    election induced) business cycle.
  • A 2005 study suggested that political business
    cycles have been concentrated in the Latin
    America region.
  • Empirical work suggests that countries with the
    most independent central banks do the best job of
    controlling inflation and achieving economic
    growth (see slides which review this evidence).
  • Case against Central Bank Independence
  • Central Bank should be accountable (at least in
    terms of their goals) to their general
    populations (and perhaps less so in terms of
    their policies to achieve goals).
  • Hinders coordination of monetary and fiscal

How Independent are Central Banks Today?
  • Some central banks which we characterized as
    independent have their inflation goals set by
    their national governments, but are given freedom
    with regard to the use of policy instruments to
    achieve those goals.
  • Bank of England The Banks monetary policy
    objective is to deliver price stability. Price
    stability is defined by the Governments
    inflation target of 2. The 1998 Bank of England
    Act made the Bank independent to set interest
    rates. (Bank web-site).
  • Other examples Brazil, China, Mexico

Variations on Inflation Target Process
  • Switzerland the central bank has authority to
    set its inflation target (currently at no more
    than 2 a year for the medium to long term).
  • ECB governing council sets its own inflation
    target (currently 2) consistent with the 1992
    Maastricht Treatys stated goal of price
  • Canada and New Zealands inflation targets are
    determined jointly by their respective
    governments and their central banks.
  • Both the U.S. and Japan, where neither the Fed
    nor the BOJ has specific mandated government
    (inflation) goals.

Central Bank Independence and Inflation, 1955-1988
Central Bank Independence and Inflation, 1973-1988
Central Bank Independence and Economic Growth,
Visualizing the Path of Central Bank Monetary
  • Monetary Policy Tools (Policy Instruments)
  • (1) Open market operations (buying and selling
  • (2) Discount window (borrowing) facilities
  • (3) Reserve requirement adjustments
  • (4) Intervention in foreign exchange markets
  • Operational Targets (Targets of Policy Actions)
  • Monetary aggregates (money supply measures)
  • Financial market variables (short interest rates,
    exchange rates)
  • Macroeconomic Target (Ultimate Goals of Policy)
  • Inflation
  • Economic growth
  • Employment
  • External trade

Question What is the Most Commonly Used of
Policy for the Fed?
  • Monetary Policy Tools (Policy Instruments)?
  • (1) Open market operations
  • (2) Discount window (borrowing) facilities
  • (3) Reserve requirement adjustments
  • (4) Intervention in foreign exchange markets
  • Operational Targets (Targets of Policy Actions)
  • Monetary aggregates (money supply measures)
  • Financial market variables (short interest rates,
    exchange rates)
  • Macroeconomic Target (Ultimate Goals of Policy)
  • Inflation
  • Economic growth
  • Employment
  • External trade

Historical Use of Fed Policy Instruments
  • 1913 Act Major policy instrument was the
    discount facility and the discount rate
    (rediscounting of commercial paper).
  • Federal Reserve Act of 1913 actually had no
    provision for changes in reserve requirements and
    open market operations as a policy tool were not
    yet discovered.
  • When discount loans (which were a source of
    income for the Fed) fell in 1920, the fed started
    to purchase seasoned securities for income and as
    they did so they quickly realized that these
    open market operations were having a impact on
    bank reserves.
  • Thus, as a result, open market operations evolved
    into the major Fed instrument from this point on.

Open Market Operations
  • (1) Open market operations Purchases and sales
    of U.S. Treasury and federal agency as specified
    by the Federal Open Market Committee (FOMC).
  • A short term objective is specified in terms of a
    desired interest rate (federal funds rate) and is
    conveyed to the Federal Reserve Bank of New York
    for implementation.
  • Since 1995 the Fed has specified an explicit
    target level for the federal funds rate.
  • For specific targets since 1995, see
  • The FOMC has regular meeting scheduled
    approximately every 6 weeks (8 times a year),
    although it can call an emergency meeting
  • For scheduled meeting and minutes of meetings
  • http//www.federalreserve.gov/monetarypolicy/fomc

Discount Facility
  • (2) The discount rate The interest rate charged
    to commercial banks and other depository
    institutions on loans they receive from their
    regional Federal Reserve Bank.
  • Federal Reserve Banks offer three discount window
    programs to depository institutions
  • (1) primary credit, i.e., overnight, (current
    rate 0.75)
  • (2) secondary credit (to meet severe short term
    financial difficulties (current rate 1.25), and
  • (3) seasonal credit, i.e., to smaller
    institutions in agricultural or seasonal resort
    areas (current rate 0.20)
  • All discount window loans must be fully secured
    (usually with Treasury securities).
  • The term discount rate is normally applied to
    the rate on primary credit loans.
  • For current and historical discount rates see

Relationship of Discount Rate to Fed Funds Rate
  • Historically, the discount rate was set below the
    federal funds rate.
  • To discourage banks from borrowing at the
    discount window and lending it out at a profit in
    the fed funds market, the Fed required a bank to
    prove it that a discount loan was its last option
    for securing needed funds.
  • In 2003, however, the Fed introduced a new policy
    by which the discount rate is now set above the
    fed funds rate.
  • Since 2003, the discount rate has averaged 85
    basis points above the effective fed funds rate.
  • See exhibits on next slide.

Fed Funds Rate and Discount Rate
  • 2003 - Present
  • 1995 - 2002

Reserve Requirements
  • (3) Reserve requirements The amount of funds
    (reserves) that a depository institution must
    hold in reserve against its specified deposit
  • Reserves can be held the form of vault cash or
    deposits with Federal Reserve Banks.
  • Reserves requirements are set against transaction
    accounts (e.g., demand deposits, NOW accounts,
    etc), time deposits, and eurocurrency deposits.
  • Under the Monetary Control Act of 1980, the Fed
    can vary reserve requirement up to 14 on
    transaction accounts and up to 9 on all other
  • This act also applies these reserve requirements
    to all commercial banks, regardless of Fed
    membership. (See next slide)
  • For historical and current reserve requirements
  • http//www.federalreserve.gov/monetarypolicy/rese

Monetary Control Act (MCA) of 1980
  • Before the passage of the MCA in 1980, only
    commercial banks that were members of the Federal
    Reserve System had to meet the Fed's reserve
  • State-chartered commercial banks that were not
    Federal Reserve members had to meet their
    respective state's reserve requirements, which
    typically were lower.
  • As a result, many commercial banks were dropping
    their Federal Reserve membership in favor of
    state charters.
  • And, as banks did so, Federal Reserve member bank
    transaction deposits fell from nearly 85 of
    total U.S. transaction deposits in the late 1950s
    to 65 by the late 1970s.
  • The MCA resolved this problem by authorizing the
    Fed to set reserve requirements for all
    depository institutions, regardless of Fed
    membership status.

Limited Use of Reserve Requirements as a Monetary
Policy Tool
  • Since 1980, there have been only a handful of
    policy-related reserve requirement changes in the
    United States. As two examples
  • In December 1990, the Fed cut the requirement on
    time deposits and on Eurocurrency deposits from
    3 to 0.
  • The Fed suggested that the cut would reduce
    banks' costs, "providing added incentive to lend
    to creditworthy borrowers.
  • In April 1992, the Fed cut the requirement on
    transaction deposits from 12 to 10.
  • The Fed suggested that this cut would put banks
    "in a better position to extend credit."

Question What Operational Target Does the Fed
  • Monetary Policy Tools (Policy Instruments)
  • Open market operations
  • Operational Targets (Targets of Policy Actions)?
  • Monetary aggregates (money supply measures)
  • Financial market variables (short interest rates,
    exchange rates)
  • Macroeconomic Target (Ultimate Goals of Policy)
  • Inflation
  • Economic growth
  • Employment
  • External trade

Historical Use of Operational Targets by the
Federal Reserve
  • Interest Rate Targets
  • In the years immediately after WW II, the Federal
    Reserve agreed to peg interest rates at very
    low levels (3/8 on Treasury bills and 2 ½ on
    Treasury bonds).
  • Fed agreed to this interest rate target as a way
    of holding down the Treasurys war financing
    costs (see next slide)
  • In 1951, an agreement was reached between the
    Treasury and the Fed agreed that the Fed would no
    longer peg Treasury interest rates (agreement
    called the The Accord) .
  • In the 1950 and 1960s, the Federal Reserve
    decided to target money market conditions, and
    specifically short term interest rates.

Short Term Interest Rates After WWII
Historical Use of Operational Targets by the
Federal Reserve
  • Recall that in the 1970s, the U.S (as well as
    other industrial countries) experienced very high
    inflation rates.
  • During this time, under increasing criticism from
    monetarists that central banks were unable
    control inflationary pressures, the shift was
    from interest rate targets to targeting of
    monetary aggregates, specifically various money
    supply measures (M1, M2, etc).
  • Milton Friedman (1968) Inflation is always and
    everywhere a monetary phenomenon.
  • By the end of the 1970s, most major central banks
    had dropped interest rate targets and adopted
    some form of monetary aggregate targeting
  • Bank of England in 1973
  • Bundesbank (Germany) in 1975
  • Bank of Japan in 1978
  • Federal Reserve October 6, 1979.

Short History of Money Supply Targeting
  • The 1978 Humphrey-Hawkins Act mandated that the
    Fed set annual targets for money supply and that
    the Fed Chairman report to Congress twice each
    year regarding these targets.
  • However, a monetary target was a appropriate only
    so long as its velocity (the rate of turnover of
    a dollar of the money supply) was stable over the
    long term.
  • Unfortunately, the long term stability of money
    velocity, which was at the core of monetarism,
    disappeared beginning in the late 1980s.
  • In addition, there was concern that in targeting
    the money supply, central banks were losing
    control over interest rates and these rates were
    becoming more volatile.

Velocity of Money
Volatility of Interest Rates in the 1980s
Return to Interest Rate Targets
  • By the 1980s, central bank concern about the
    changing velocity of money combined with the wide
    swings in interest rates which had been
    occurring, resulted in the de-emphasis this
    monetary aggregate approach.
  • Thus by the 1990s, central banks had shifted
    their operational target focus back to short term
    interest rates.
  • In July 1993, the Fed announced it was no longer
    using any monetary targets.
  • In the 1990s, most major central banks had
    abandoned monetary targets in favor of some short
    term interest rate as their operational target.
    Todays rates are
  • Fed Reserve The fed funds rate (rate for
    reserves in the interbank market).
  • Bank of England Official bank rate
  • European Central Bank Main refinancing rate
  • Bank of Japan Uncollateralized overnight call

Question What is Feds Most Commonly Used
Macroeconomic Target?
  • Monetary Policy Tool
  • Open market operations (Buying and selling
    Treasury securities)
  • Operational Target
  • Financial market variable (short term interest
  • Macroeconomic Target?
  • Inflation target
  • Economic growth target
  • Unemployment rate target
  • Exchange rates target

Early U.S. Central Bank History
  • Except for two failed attempts (1791 and 1816),
    the U.S. operated without an effective central
    bank up until 1913.
  • Prior to 1913, there were frequent economic
    recessions and financial crises in the U.S. with
    the Bank Panic of 1907 finally convincing the
    government that a central bank was necessary.
  • On December 23, 1913, Congress passed and
    President Woodrow Wilson signed into law The
    Federal Reserve Act, establishing a central bank
    for the United States.
  • The Act was also called the Glass-Owen Act.
  • The 1913 Act was to provide for establishment of
    Federal reserve banks, to furnish an elastic
    currency, to afford means of rediscounting
    commercial paper, to establish a more effective
    supervision of banking in the United States, and
    for other purposes.
  • Note There were no explicit macro economic goals
    in the 1913 Act and no mention of open market

U.S. Economic Performance During the Early Fed
Changing Goals of the Federal Reserve
  • In response to the unemployment crisis of the
    Great Depression, the U.S. Congress, in February
    1946, passed the Full Employment Act
  • The Congress hereby declares that it is the
    continuing policy and responsibility of the
    Federal Government to promote maximum
    employment, production and purchasing power.
  • These new goals also become the goals of the
    central bank.

The 1970s -80s A New Problem
  • Recall, in the 1970s, global inflation became
    the major economic issue for industrial
  • Two distinct inflation peaks 1973/74 and
  • As a result, many central banks turned their
    attention to inflation and some to the use of
    inflation targets as a macro economic goal.
  • Begins with New Zealand adopting an inflation
    target of 0 to 2 in March 1980.
  • Inflation in Industrial Countries, per year

Adoption of Explicit Inflation Targets
  • Early Adopters (with original target)
  • New Zealand March 1990 (set at 0 to 2)
  • Canada February 1991 (set at 1 to 3)
  • United Kingdom October 1992 (set at 2)
  • Australia January 1993 (set a 2 to 3)
  • Sweden January 1993 (set at 2)
  • Finland February 1993 (set at 2)
  • Spain January 1995 (set at 3.5 to 4)
  • Later Adopters (with original target)
  • Euro-zone Jan 1999 (set below, but close to, 2)
  • Poland January 1999 (8 to 8.5)
  • Brazil June 1999 (set at 8)
  • South Africa 2002 (set a 3 to 6)

Initial Response of the U.S. to High Inflation
  • In 1977, additional mandates for the Federal
    Reserve were introduced with Congressional
    amendments to the Federal Reserve Act
  • The 1977 amendments required the Board of
    Governors and the FOMC to "maintain the growth of
    monetary and credit aggregates commensurate with
    the economy's long-run potential to increase
    production, so as to promote effectively the
    goals of maximum employment, stable prices, and
    moderate long-term interest rates.
  • However, no explicit inflation targets were
    introduced at that time.
  • U.S. Inflation

History of Macroeconomic Targets
  • From a practical standpoint there are any number
    of macroeconomic variable a central bank might
    target, including
  • A unemployment rate (has been proposed for South
  • A real GDP growth rate
  • An exchange rate (Bretton Woods, 1944 1971
    U.K. October 1990 September 1992 Hong Kong
    and Singapore today)
  • An inflation target
  • The use of exchange rate targets was popular
    among some central banks in the late 1980s/early
  • Bank of England adopted an exchange rate target
    in 1990.
  • As noted earlier, in March 1990, the Central Bank
    of New Zealand was the first to adopt an
    inflation target.
  • Over the decade of the 1990s, a growing number of
    countries adopted inflation targets
  • From 4 countries in 1990 to 54 by 1998.
  • And in 2009 the U.S. followed with an announced
    implied inflation target of 2

Case Study Inflation Targeting in New Zealand
  • Note GST refers to Goods and Services Tax
  • New Zealand had informally targeted inflation
    at 0 to 2 beginning in 1988 although in 1990 it
    was formally introduced into law with the New
    Zealand Act of 1989.

Inflation Targeting Impact on Interest Rates New
Final Issue Central Bank Transparency
  • Transparency means that a central bank provides
    the general public and financial markets with
    relevant information in an open, clear and timely
  • Transparency is potentially important because it
    reduces uncertainty about a central banks
  • Helps the financial market establish anchors
    critical to their expectations.
  • Today, most central banks consider transparency
    as crucial to their success.
  • Monetary policy is assumed to be more effective
    when the central bank provides the public with
    guidance on its objectives, activities and

Central Bank Transparency
  • Many Central Bank web sites are now in English
  • Visit http//www.bis.org/cbanks.htm
  • Many central bankers regularly talk to the
  • Central Bank decisions and actions are published
    in a timely manner.
  • Federal Reserve Bank Has eight scheduled
    meetings per year. A press statement is released
    immediately following each meeting.
  • http//www.federalreserve.gov/fomc/calendars
  • Bank of England Monetary Policy Committee meets
    the first Thursday of every month. The decisions
    on interest rates are announced at 12 noon
    immediately following the meeting.
  • http//www.bankofengland.co.uk/monetarypolicy/deci
  • Governing Council of the ECB meets on the first
    Thursday of each month with the decision on the
    key ECB interest rates is issued at 145 p.m.
    C.E.T. At 230 p.m. C.E.T. , the President and
    the Vice-President of the ECB hold a press
    conference to discuss the decision.
  • http//www.ecb.int/press/govcdec/mopo/2007/html/in
  • Bank of Japan announce their interest rate
    decisions immediately following their meeting.
  • http//www.boj.or.jp/en/mopo/mpmdeci/index.htm/

ECB and Bank of England Press Releases
  • ECB http//www.ecb.int/press/html/index.en.html
  • ECB Follow-up (With Q and A) http//www.ecb.int/pr
  • Bank of England http//www.bankofengland.co.uk/pu

Measures of Central Bank Transparency
Fed ECB UK Japan Canada NZ AU
Goal of Monetary Policy and Accountability              
Explicit Inflation Target Specified No Yes Yes No Yes Yes Yes
Inflation Target/Range  2 lt2 2  ---- 1-3 1-3 2-3
Reports to Legislature (Accountability) Yes Yes Yes Yes Yes Yes Yes
Information To Financial Markets              
Reports on Monetary Policy S M Q M Q Q Q
Forecasts Released S S Q S Q Q Q
Operational Procedures              
Policy Meetings Per Year 8 12 12 14 8 8 11
Decisions Announced Immediately After Policy Meetings Yes Yes Yes Yes Yes Yes Yes
Press Releases Immediately After Policy Meetings Yes Yes Yes Yes Yes Yes Yes
Press Conferences (After Meetings) Yes Yes Yes Yes No Yes No
Voting Results Published Yes No Yes Yes No No Yes
Full Minutes of Policy Meetings Published Yes No Yes Yes No No Yes
Weeks After Minutes Published 3   2 5     2
Note Implied Target for U.S. Fed will hold 4 a year, beginning in April 2011. M Monthly Q Quarterly S Semi-annual.        
Links to Worlds Major Central Banks
  • United States
  • http//www.federalreserve.gov/
  • European Union
  • http//www.ecb.int/
  • Bank of England
  • http//www.bankofengland.co.uk/
  • Bank of Japan
  • http//www.boj.or.jp/en/index.htm

Other Useful Web Sites
  • Links to all the worlds Central Banks (note 172
    banks as of March 27, 2011)
  • http//www.bis.org/cbanks.htm
  • Federal Reserve statistical data
  • http//www.federalreserve.gov/releases/
  • Economic time series, U.S. and some foreign (also
    allowing for graphing of data)
  • http//www.economagic.com/

Appendix 1 The Channel of Fed Policy
  • The following is from the Federal Reserve web
    site and articulates in the Feds words the
    channel of monetary policy in the U.S. today

U.S. Monetary Policy Channel
  • According to the Federal Reserve
  • Using the three policy instruments, the Federal
    Reserve influences the demand for, and supply of,
    balances that depository institutions hold at
    Federal Reserve Banks and in this way alters the
    federal funds rate.
  • Changes in the federal funds rate trigger a chain
    of events that affect other short-term interest
    rates, foreign exchange rates, long-term interest
    rates, the amount of money and credit, and,
    ultimately, a range of economic variables,
    including employment, output, and prices of goods
    and services.
  • http//www.federalreserve.gov/monetarypolicy/fomc.

Appendix 2 The Organizational Structure of the
Federal Reserve
Formal Structure of the Federal Reserve System
  • The system (i.e., formal structure) as it exists
    now includes
  • Twelve Federal Reserve Banks
  • Member Banks, i.e., members of the Federal
    Reserve (around 3,600, out of about 7,500 banks)
  • Seven individuals who are members of the Board of
    Governors (BOG) of the Federal Reserve System
    (including a Chairman).
  • Twelve individual members of the Federal Open
    Market Committee (FOMC).
  • Federal Advisory Council (12 bankers)
  • Note The system, however, is dominated by the
    Board of Governors

Formal Structure of the Fed
The Twelve Federal Reserve Districts
The Federal Open Market Committee
  • Undoubtedly the most closely watch group within
    the Federal Reserve is the Federal Open Market
  • There are 12 members on the FOMC
  • All seven members of the Board of Governors plus
    the president of the Federal Reserve Bank of New
    York and four other presidents among the
    remaining 11 Federal Reserve District Banks (see
    Appendix 1 for the Fed structure).
  • The chairman of the Board of Governors is the
    chair of the FOMC.
  • The FOMC has scheduled meetings 8 times a year
    (about every 6 weeks) although emergency
    meetings can be called anytime, and at these
  • The FOMC makes decisions regarding the level of
    the federal funds rate.

Appendix 3 History of Other Major Central Banks
  • The Bank of England, the Bank of Japan and the
    European Central Bank are discussed in the slides
    that follow

Bank of England
  • Founded in 1694 initially to manage the U.K.
    Governments accounts and to borrow on behalf of
    the Government (usually to finance wars with
  • Controlled by the Government until granted
    interest rate autonomy in 1997 by the Labor
  • Since May 1997 the Banks 9 member Monetary
    Policy Committee has had statutory responsibility
    for setting interest rates to meet the
    Government's stated inflation target.
  • Each year the Chancellor of the Exchequer sets an
    inflation target for the country (currently 2).
  • The MPC has to judge what interest rate is
    necessary to meet that inflation target.
  • The Bank implements its interest rate decisions
    by setting the interest rate at which the Bank
    lends to commercial banks and other financial
    institutions in the U.K.

European Central Bank (ECB)
  • Founded in January 1999 by a treaty between the
    European Central Bank (ECB) and the European
    System of Central Banks (ESCB).
  • Stated goal is to maintain price stability in the
    euro area (at inflation rates of below, but close
    to, 2 over the medium term).
  • The 18 member Governing Council is the main
    decision making body of the ECB.
  • Consist of 6 Executive Board Members (chosen by
    the 12 euro member governments) plus the 12
    governors of all the national central banks from
    the 12 euro area countries
  • The Governing Council meets its inflation target
    by setting the interest rate at which banks
    borrow from the central bank (similar to U.S.
    federal funds rate).
  • The key ECB rate is the interest rate on
    refinancing operations which provide the bulk
    of liquidity to the banking system.

Bank of Japan (Nippon Ginko)
  • Founded in 1882.
  • The Bank of Japan Law (1998) gave the Bank of
    Japan autonomy for monetary policy.
  • Also stated that monetary control shall pursuit
    price stability.
  • The 7 member Policy Board targets an overnight
    interest rate for uncollateralized call money
    (similar to U.S. federal funds).
  • The Bank controls the call money rate on a daily
    basis through money market operations (similar to
    open market operations).
  • Also uses an official discount rate at which it
    will make loans to banks.
  • At the present time, the Bank of Japan does not
    have a specified inflation target.
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