On Central Banks

Objective Understand the role and functioning of central banks

Outline The ABC of central bank balance sheet The concept of monetary base On seignorage The role of central banks

History Risens Standers Bank - later Swedish Sveriges Riksbank (1668). The Bank of England (1694): to help finance England’s wars with France. Bank of the United States (1790): to enlarge the mass of industrious and commercial enterprise. Banque de France (1800): to manage public debt.

Central Bank balance sheet 101: The Bundesbank Assets Domestic securities 64% Direct loans to banks 2% Other loans 4% Gold and SDRs 4% Foreign currency 26% Total 100% Liabilities Currency 70% Bank reserve deposits 13% Other 13% Equity 4% Total 100%

Central Bank balance sheet 101: The US Federal Reserve Assets US Treasury securities 88% Gold and SDRs 4% Foreign currency 4% Cash being collected 1% Other 3% Total 100% Liabilities Currency 91% Bank reserve deposits 4% US Treasury deposits 1% Other 1% Equity 4% Total 100%

Central Bank balance sheet 101: The Bank of Japan Assets Government securities 74% Loans 9% Foreign currency 5% Other 12% Total 100% Liabilities Currency 62% Bank reserve deposits 5% Government deposits 2% Other 17% Equity 3% Total 100%

Central Bank balance sheet 101: Generalization Assets Domestic credit Foreign currency Monetary Base Liabilities Domestic currency Bank reserves Monetary Base

Currency as liability Initially, currency notes could be exchanged for gold. Today, central banks are liable for the value of goods and services that can be purchased with the currency notes.

Central bank ownership State owned Argentina, Australia, Canada, Denmark, France, Finland, Germany, Ireland, India, Holland, New Zealand, Norway, Spain, Sweden, UK Privately owned South Africa, Switzerland, US Mixed ownership Austria (50%), Belgium (50%), Chile (50%), Greece (10%), Japan (55%), Mexico (51%), Turkey (25%)

Seignorage Face value of money - Cost of producing money

Seignorage: Origins The metal content of coins was being reduced to cover production costs, to assert authority, or simply to fill the seigneur's treasuries.

The Role of Central Banks Central Banks as Government Banks Central Banks as Bankers’ Banks Central Banks as Monetary Policymakers

Central Banks as Government Banks Government depositories Central banks receive and make payments on behalf of the government. Fiscal agents Central banks issue, service, and redeem governments debts.

Central Banks as Bankers’ Banks Lenders of last resort To minimize the probability of bank runs.

Central Banks as Monetary Policymakers Interest rates on Central Bank advances to other banks Discount rate (subsidy rate) and rationed credit: The FED Subsidy and Lombard rates (penalty rate): The Bundesbank and The Swiss Nat’l Bank Multiple discount rates: The Bank of Japan Overnight rate (penalty rate): Bank of Canada and Bank of England Open-market operations: purchase or sale of government or private securities Outright transactions: US, Canada, Repurchase agreements: US, Germany Reserve requirements Force banks to adjust the amount of credit granted to other agents

Sterilized interventions Open-market interventions are often mirrored in foreign exchange interventions and vice-versa. Why? To keep the money supply stable

The Assignment problem Who should play a central role in achieving the national economic policy goals: The Central Bank or the Ministry of Finance? Should the Central Bank look after the growth of the GDP? Should the Ministry of Finance balance national accounts? Vice-versa? The answer varies across nations as a function of policy goals.

Summary Central bank assets: Domestic credit + Foreign currencies Central bank liabilities: Domestic currency + Bank reserves Monetary base = DC + FC = CURR + BRES Seignorage = face value - cost Central bank role: Government’s bank Banks’ bank Monetary policymaker