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Transcript of CENTRAL BANKS:
A Global Perspective
design by Dóri Sirály for Prezi
PRICE STABILITY GOAL
Goals of Monetary Policy
By adopting suitable monetary policy, a government tries to achieve economic development. As a result of economic development, there will be:
proper utilization of natural and human resources
more capital formation
increase in national and per capital income
increase in income along with an increase in the standard of living
What is Monetary Policy?
actions of a central bank, currency board or other regulatory committee
that determine the size and rate of growth of the money supply, which in turn affects interest rates.
The traditional objective of monetary policy has been the achievement of stable exchange rates.
Balance of payment creates fluctuation in the foreign exchange rates.
The exchange rates, therefore, has to be adjusted to achieve the favorable balance of payments.
Stable prices improve public confidence, promote business activity and ensure equal distribution of income and wealth. As a result, it will enhance the prosperity and welfare in the community. But a determination of a satisfactory price level is a difficult task.
To attain this objective, it is necessary to increase production and demand. During the boom period the position is automatically achieved as there is rapid increase in demand and thereby production is also increased. On the contrary, during depression there is low production because of low demand and wide unemployment. Hence, the objective of monetary policy is to
check rising unemployment during depression period.
To control credit, government uses the tools like;
Bank Rate Policy
Open Market operation
Statutory Liquidity Ratio and
Cash Reserve Ratio
REDUCTION IN EQUALITY AND WEALTH
Inequality in income and wealth due to right of private property and law of inheritance is the common feature of capitalist and mixed economy. As a result, the society is divided into two classes, rich and poor. Poor class is generally exploited by rich class. The objective of monetary policy is
to reduce the inequalities of income and wealth.
CREATION AND EXPANSION OF FINANCIAL INSTITUTION
A major objective of monetary policy in a developing country is
to speed up the process of economic development
by improving the currency to provide large credit facilities and to mobilize savings for productive purposes. The monetary authority can help in establishment and expansion of banks and institutions in urban and rural areas.
The primary objective of the
BSP's monetary policy
is “to promote price stability conducive to a balanced and sustainable growth of the economy” (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January 2002 is aimed at achieving this objective.
Central Bank in developing countries and Emerging Countries
In the developing countries, the central bank has to play a much wider role. Since the developing countries do not have well- organized money and capital markets, the central bank has a crucial function to develop the banking and financial system of the country.
The central bank performs the following developmental and promotional functions in the developing countries:
of the central bank are : having the monopoly of note-issue; acting as banker to the government; serving as bankers' bank; functioning as the lender of the last resort; controlling and regulating the credit; and maintaining the external stability.
1. Traditional Functions:
2. Economic Growth:
Economic growth requires sufficient financial resources. The central bank can ensure adequate monetary expansion in the country. Moreover, as a banker to the government, the central bank can provide funds for initiating investment in the public sector.
3. Internal Stability:
The developing countries are susceptible to inflationary pressures mainly due to supply -in elasticity in the short period. The central bank should adopt such a monetary policy that can control inflationary tendencies and ensure price stability.
4. Development of Banking System:
The developing and underdeveloped countries do not have well-developed banking system. In such an economy, the central bank should not only take measures to develop an integrated commercial banking system, but also should not hesitate undertaking directly the commercial banking functions.
5. Branch Expansion:
In developing countries, the commercial banks generally concentrate their branches in the urban areas. In order to extend credit facilities to the agricultural sector, the central bank should prepare program for branch expansion in the rural areas.
6. Development of Financial Institutions:
Development of the leading sectors of the economy such as agriculture, industry, foreign trade, etc. requires long-term finances. For this, the specialized financial institutions should be established which provide term-loans to these sectors.
7. Development of Banking Habits:
Through its various credit control instruments (i.e., bank rate, variable cash-reserve ratio, etc.) and by providing discounting facilities to the commercial banks, the central bank exercises full control over the activities of commercial banks. This creates public confidence in the banking system and helps in the development of banking habits of the people.
8. Training Facilities:
A major difficulty in developing the banking system in developing countries is the lack of trained staff. The central bank can provide training facilities to meet the personnel requirements of the banks.
9. Proper Interest Rate Structure:
The central bank can help in establishing a suitable interest rate structure to influence the direction of investment in the country. In underdeveloped countries, a policy of low interest rate is necessary for encouraging investment and promoting development activities. Again, by adopting different interest rates, the central bank can increase productive investment and discourage unproductive investment.
10. Other Promotional Roles:
The central bank can provide a number of other promotional facilities.
(a) it can adopt policies to provide help to the various priority sectors, such as agriculture;, cooperative sector, small scale sector, export sector, etc. (b) it can provide guidelines to be followed by the planners about some definite patterns of economic and investment policies; (c) it can publish information regarding the state of the economy and promote research in money and banking.
Price stability is a significant objective of monetary policy.
When inflation is high, variable or both, it interferes with the efficient operation of the economy and can reduce economic growth.
Price Stability is not inconsistent with the “other goals” in the long run. For example, there is no trade-off between inflation and employment in the long run.
However, there are short-run trade-offs. For example, an increase in interest rates will help prevent inflation but does increase unemployment in the short-run.
The benefits of Price stability
The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability contributes to achieving high levels of economic activity and employment by:
Improving the transparency of the price mechanism. Under price stability people can recognize changes in relative prices (ex. Prices between different goods), without being confused by changes in the overall price. This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently;
• Reducing inflation risk premix in interest rates (ex. Compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest;
• Avoiding unproductive activities to hedge against the negative impact of inflation or deflation;
• Reducing distortions of inflation or deflation, which can exacerbate the distortionary impact on economic behavior of tax and social security systems;
• Preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation;
• And contributing to financial stability.
The Federal Reserve System
The Federal Reserve System
(also known as the
, and informally as the
is the central banking system of the United States that regulates the U.S. monetary and financial system.
It was created on
December 23, 1913
, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.
The Federal Reserve System's structure is composed of:
• presidentially appointed Board of Governors (or Federal Reserve Board)
• the Federal Open Market Committee (FOMC)
- the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents
• Twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.
The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act:
• Maximum employment
• Stable prices, and
• Moderate long-term interest rates.
The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include:
conducting the nation's monetary policy
supervising and regulating banking institutions
maintaining the stability of the financial system
Providing financial services to depository institutions, the U.S. government, and foreign official institutions.
Central Bank in transition economies
In 2000, the IMF listed the following countries with transition economies:
• Czech Republic
transition economy or transitional economy
is an economy which is changing from a centrally planned economy to a free market. Transition economies undergo economic liberalization, where market forces set prices rather than a central planning organization.
Central Banks around the World
The Bank of Canada (French: Banque du Canada) is Canada's central bank.The bank was founded by the Bank of Canada Act on July 3, 1934, as a privately owned corporation.Their principal role, as defined in the Bank of Canada Act, is "to promote the economic and financial welfare of Canada."
In 1938, it became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank. Ultimately, the Bank is owned by the people of Canada.
The Bank is not a government department and conducts its activities with considerable independence compared with most other federal institutions. For example:
• The Governor and Senior Deputy Governor are appointed by the Bank's Board of Directors (with the approval of Cabinet), not by the federal government.
• The Deputy Minister of Finance sits on the Board of Directors but has no vote.
• The Bank submits its expenditures to its Board of Directors. Federal government departments submit theirs to the Treasury Board.
• Bank employees are regulated by the Bank itself, not by federal public service agencies.
• The Bank's books are audited by external auditors appointed by Cabinet on the recommendation of the Minister of Finance, not by the Auditor General of Canada.
As the nation's central bank, the Bank of Canada has four main areas of responsibility:
The Bank contributes to solid economic performance and rising living standards for Canadians by keeping inflation low, stable and predictable. Since 1991, the Bank’s monetary policy actions toward this goal have been guided by a clearly defined inflation target.
The Bank designs, produces and distributes Canada’s bank notes and replaces worn notes. It deters counterfeiting through leading-edge bank note design, public education and collaboration with law-enforcement agencies
The Bank promotes a stable and efficient financial system in Canada and internationally. To this end, the Bank oversees Canada’s key payment, clearing and settlement systems; acts as lender of last resort; assesses risks to financial stability; and contributes to the development of financial system policies.
The Bank provides effective and efficient funds-management services for the Government of Canada, as well as on its own behalf and for other clients. For the government, the Bank provides treasury-management services and administers and advises on the public debt and foreign exchange reserves.
• Kyrgyz Republic
• Republic of Macedonia
• Slovak Republic
The Bank of England is the central bank of the United Kingdom. Sometimes known as the “Old Lady” of Threadneedle Street, the Bank was founded in 1694, nationalized on 1 March 1946, and in 1997 gained operational independence to set monetary policy.
The financial crisis demonstrated the need for a new approach to financial regulation and major changes to the Bank came into force in April 2013. The Financial Services Act 2012 established an independent Financial Policy Committee (FPC), a new prudential regulator as a subsidiary of the Bank, and created new responsibilities for the supervision of financial market infrastructure providers.
The Court of Directors
The members of Court are appointed by the Crown. The nine Directors are all non-executive. One of them is designated by the Chancellor of the Exchequer to chair Court.
The Governors are appointed by the Crown. The Governor for a period of eight years, the Deputy Governors for five years, and the Directors for three years.
Roles and functions
The Bank's roles and functions have evolved and changed over its three-hundred year history.
Since its foundation, it has been the Government's banker and, since the late 18th century, it has been banker to the banking system more generally – the bankers' bank.
As well as providing banking services to its customers, the Bank of England manages the UK's foreign exchange and gold reserves.
The Bank has two core purposes – monetary stability and financial stability.
The Bank is perhaps most visible to the general public through its banknotes and, more recently, its interest rate decisions.
The Bank has had a monopoly on the issue of banknotes in England and Wales since the early 20th century.
But it is only since 1997 that the Bank has had statutory responsibility for setting official interest rates in the UK.
The Bank’s relationship with Parliament
The principal means of accountability for the Bank is via the House of Commons Treasury Committee.
• Through regular hearings on the Bank’s Inflation Report and Financial Stability Report at which Monetary Policy Committee (MPC) and Financial Policy Committee (FPC) members give evidence
• Through appointment hearings for new MPC and FPC members in order to satisfy itself that they meet the criteria of professional competence and independence
The Treasury Committee has no statutory power of veto on MPC/ FPC appointments but it does report to Parliament on its assessments of appointees.
The Bank of Japan is the central bank of Japan. It is a juridical person established based on the Bank of Japan Act (hereafter the Act), and is not a government agency or a private corporation.
The Bank of Japan was established under the Bank of Japan Act (promulgated in June 1882) and began operating on October 10, 1882, as the nation's central bank. The Bank was reorganized on May 1, 1942 in conformity with the Bank of Japan Act (hereafter the Act of 1942), promulgated in February 1942.
The Act of 1942 was amended several times after World War II. Such amendments included the establishment of the Policy Board as the Bank's highest decision-making body in June 1949.
The Act of 1942 was revised completely in June 1997 under the two principles of "independence" and "transparency." The revised act (the Act) came into effect on April 1, 1998.
Policy Board (9 persons)
The Bank‘s highest decision-making body, which determines the guideline for currency and monetary control, and sets the basic principles for carrying out the Bank's operations.
The Board oversees the fulfillment of the duties of the Bank’s officers, excluding Auditors and Counselors’.
• Deputy Governors (2 persons)
• Executive Directors (6 persons)
1. The Policy Board
The Policy Board is established as the Bank's highest decision-making body. The Board determines the guideline for currency and monetary control, sets the basic principles for carrying out the Bank's operations, and oversees the fulfillment of the duties of the Bank's officers, excluding Auditors and Counsellors.
2. The Bank's Officers
The Bank's officers are Policy Board members (including the Governor and the Deputy Governors), Auditors, Executive Directors, and Counselors.
The number of posts given to the Bank's officers is as follows: the Governor (one), the Deputy Governors (two), the Members of the Policy Board (six), the Auditors (three or fewer), the Executive Directors (six or fewer), and the Counselors (a few).
3. Departments, Branches, Local Offices in Japan, and Overseas Representative Offices
There are 15 departments at the Bank's Head Office (see Organization chart for details).
The Bank has 32 branches and 14 local offices in Japan, and seven overseas representatives.
The Act sets the Bank's objectives "to issue banknotes and to carry out currency and monetary control" and "to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of stability of the financial system."
The Act also stipulates the Bank's principle of currency and monetary control as follows: "currency and monetary control by the Bank of Japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy."
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