Department of Economics
Saint Louis University
Professor: Rapach
Fall 2008
ECON 420
Money and Banking

Chapter Outline for “Chapter 12—Structure of Central Banks and the Federal Reserve System,” Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, Eighth Edition (New York, N.Y.: Addison-Wesley, 2006)

ORIGINS OF THE FEDERAL RESERVE SYSTEM

STRUCTURE OF THE FEDERAL RESERVE SYSTEM

See Figure 1

Federal Reserve Banks

See Figure 2

Functions of the 12 Federal Reserve Banks:

·        Clear checks

·        Issue new currency

·        Withdraw damaged currency from circulation

·        Administer and make discount loans to banks in their districts

·        Evaluate proposed mergers and applications for banks to expand their activities

·        Act as liaisons between the business community and the Federal Reserve System

·        Examine bank holding companies and state-chartered member banks

·        Collect data on local business conditions

·        Use their staffs of professional economists to research topics related to the conduct of monetary policy

12 Federal Reserve Banks are involved in monetary policy in several ways:

1.      Directors “establish” discount rate (although the discount rate in each district is reviewed and determined by the Board of Governors)

2.      Decide which banks, member and nonmember alike, can obtain discount loans from the Federal Reserve bank

3.      Directors select one commercial banker from each bank’s district to serve on the Federal Advisory Council, which consults with the Board of Governors and provides information that helps in the conduct of monetary policy

4.      Five of 12 banks presidents have a vote in the FOMC, which directs open market operations

Member Banks

Board of Governors of the Federal Reserve System

Federal Open Market Committee (FOMC)

The FOMC Meeting

Why the Chairman of the Board of Governors Really Runs the Show

HOW INDEPENDENT IS THE FED?

instrument independence: ability of the central bank to set monetary policy instruments

goal independence: ability of the central bank to set the goals of monetary policy

STRUCTURE AND INDEPENDENCE OF THE EUROPEAN CENTRAL BANK

Differences Between the European System of Central Banks and the Federal Reserve System

Governing Council

How Independent Is the ECB?

STRUCTURE AND INDEPENDENCE OF OTHER FOREIGN CENTRAL BANKS

Bank of Canada

Bank of England

Bank of Japan

The Trend Toward Greater Independence

EXPLAINING CENTRAL BANK BEHAVIOR

SHOULD THE FED BE INDEPENDENT?

The Case for Independence

political business cycle: just before an election, expansionary policies are pursued to lower unemployment and interest rates; after the election, the potentially bad effects of these policies—high inflation and high interest rates—come home to roost

The Case Against Independence

Central Bank Independence and Macroeconomic Performance Throughout the World

Questions and Problems: 2, 6, 8, 10, 12, 14