CENTRAL BANK Lecturer: Prof. Insukindro, Ph.D

THEORY OF CENTRAL BANK - Non profit institution CONCEPT OF CENTRAL BANK - Hegemonic system - Non profit institution Case 1: Transmission Role A B C D m n X I II CB

THEORY OF CENTRAL BANK Case 2: Intermediation Role A (+) B (-) C D I II CFI FI 2 FI 1

THEORY OF CENTRAL BANK Micro approach: FUNCTIONS OF CENTRAL BANK - Club theory, Banker’s bank or lender of last resort - To maintain stability in the banking system. A B C D I II CB CoB2 CoB1

THEORY OF CENTRAL BANK MACRO APPROACH ~ Monetary Authority - Domestics Internal balance: g, π, μ - to preserve the value of the currency - to formulate & implement monetary policy The relationship between Central Bank and government and other financial institutions. - International External balance: BOP = 0 Exchange rate International Financial Institutions

Central Bank’s role in the flow of funds 6 Financial System Financial Market Returns Returns Funds Funds Government / Central Bank Involvement Households Firms Government Households Firms Government Savers Borrowers Funds Financial Intermediaries Funds Returns Returns Infrastructure and Environtment Source: PPSK BI, 2006, Insukindro (2007) and Hubbard (2008: 39), modified,

Key Services Provided by the Financial System 7 Risk Sharing Liquidity Financial System Financial Market Returns Returns Funds Funds Government / Central Bank/ Financial Authority Involvement Households Firms Government Households Firms Government Savers / Suppliers Borrowers / Demanders Financial Intermediaries Funds Funds Returns Returns Infrastructure and Environment Information Source: PPSK BI (2006); Insukindro (2007) and Hubbard (2008:39, 41), modified 7

INTER-RELATIONSHIP BETWEEN ECONOMIC SECTORS Real Sectors Consumption Investment Export Import External Sectors Current Account Export Import Transfer Income Capital and Financial Transactions Direct Investment Financial Flows Government Sectors Private Sectors International Reserves Government Sectors Government Budget Government Revenue Government Expenditure Equilibrium (overall) Sources of Funds Domestic Foreign Monetary Sectors Monetary Authority Net Foreign Assets Net Domestic Assets Net Claim on Government Commercial Bank Reserve Money Source: PPSK BI, 2006 Money in Circulation

VARIOUS TASKS OF CENTRAL BANKS 1. As bank-of the banks and insurer (lender of last resort). 2. As a publicly owned or publicly controlled corporation. 3. As a monopoly provider of public goods (a stable currency and well-functioning payment system). 4. As a regulator that produces & enforces secondary regulation & guideline relating to bank solvency, entry and competition.

Consolidated Balance Sheet of Central Bank Sources of Reserve Money December 31, 2008 Sources of Reserve Money Uses of Reserve Money 1. External Source: International Reserve 2. Internal Sources: a. Net Claims on Public Sectors: - Central Bank - Claims on Official Entities & Public Enterprises b. Claims on Deposits Money Banks c. Other sources 1. Money outside bank a. Currency held by the public b. Private sector demand deposits 2. Banks reserve a. Currency held by the banks b. Banker’s Deposits 3. Other Uses Total Sources Total Uses

CENTRAL BANK IN SOME COUNTRIES (Warjiyo, 2004: 23) Country Monet. Authority Bank Regulator Payment System Hongkong Yes No England Australia Japan Partly USA France Netherlands Italy Germany South Africa Brasil India Singapore Indonesia Malaysia

Frisell et al (2004)

Frisell et al (2004)

Frisell et al (2004)

Frisell et al (2004)

Financial Independence (Out of 26 cases) Laws set upon the bank that rules on the allocation of profits to reserves and government, by specifying a decision making process and/or fixed shares or amounts 88% No laws regarding profit 8% Other 4% Frisell et al (2004)

The Governor is Appointed by (Out of 41 cases) Frisell et al (2004)

Only one institution is Number of Institutions Involved in the Appointment Process (out of 41 cases) One institution appoints and another advises or recommends 36% A more multi-faceted appointment process takes place 5% Only one institution is involved 27% One institution appoints and another agrees 32% Frisell et al (2004)

Frisell et al (2004)

Frisell et al (2004)

STRUCTURE OF CENTRAL BANK 1. Federal Reserve System 2. Bank of China 3. Bank of Indonesia or Bank Indonesia 4. Bank of England 5. Bank of Japan 6. European Central Bank 7. Bank of Canada, etc Mishkin (2003: Ch. 14), Warjiyo (2003).

The Formal Structure and Policy of the Federal Reserve System Source: Ritter at al. (2009: 331)

The Federal Reserve System Source: Ritter at al. (2009: 332)

The Realities of Power Within the Federal Reserve System Source: Ritter at al. (2009:333)

Currency Flow Before the Reform in China Source: Gang ,1994: 25

Bank Transfer Money Flow After the Reforms in China Source: Gang ,1994: 26

Financial Institutions in China Source: Gang ,1994: 37

REFERENCES Frisell, L., K. Roszbach and G. Spagnolo (2008), Governing the Governors: A Clinical Study of Central Banks, Sveriges Riksbank Working Paper Series, No. 221, May. Gang ,Yi. 1994. Money, Banking & Financial Markets in China. Westview Press Hubbard, R.G. (2008), Money, the Financial System, and the Economy, Pearson Education, Inc Insukindro (2007), Penilaian Kekayaan Negara dan Daerah: Pendekatan Triangulasi, Makalah Seminar Nasional Penilaian, Kerjasama DJKN Depkeu dan MEP FE UGM, Yogyakarta, 9 Juni. Mishkin, F.S. (2003), The Economics of Money, Banking and Financial Markets, Addison Wesley PPSK BI (2006), Modul Kebanksentralan. Ritter, L.S., W.L. Silber and G.F. Udell (2009), Principles of Money, Banking & Financial Markets, Pearson Education, Inc. Warjiyo, P. (eds) (2004), Bank Indonesia Bank Sentral Republik Indonesia: Sebuah Pengantar, PPSK Bank Indonesia