Central Banking and the Conduct of Monetary Policy Part III Central Banking and the Conduct of Monetary Policy

Structure of Central Banks and the Federal Reserve System Chapter Six Structure of Central Banks and the Federal Reserve System

Formal Structure of the Fed Figure 6.1: Formal Structure and Allocation of Policy Tools in the Federal Reserve Copyright © 2003 Pearson Education, Inc. Federal Reserve home page http://www.federalreserve.gov/

Federal Reserve Districts Figure 6.2: Federal Reserve System Copyright © 2003 Pearson Education, Inc.

Informal Structure of the Fed Figure 6.3: Informal Power Structure of the Federal Reserve System Copyright © 2003 Pearson Education, Inc.

Central Bank Independence Factors making Fed independent Members of Board have long terms Fed is financially independent—this is most important Factors making Fed dependent Congress can amend Fed legislation President appoints Chairmen and Board members and can influence legislation Overall, Fed is quite independent Copyright © 2003 Pearson Education, Inc.

Central Bank Independence Other Central Banks Bank of Canada and Bank of Japan—fair degree of independence, but not all on paper Bank of England and Bank of Japan made more independent in 1997 and 1998, respectively. European Central Bank most independent Trend to greater independence Copyright © 2003 Pearson Education, Inc.

Explaining Central Bank Behavior Theory of Bureaucratic Behavior Is an example of principal-agent problem Bureaucracy often acts in own interest Implications for Central Bank Behavior Act to preserve independence Try to avoid controversy—often plays games Seek additional power over banks Copyright © 2003 Pearson Education, Inc.

Explaining Central Bank Behavior Should Fed be independent? Case for Independent Fed likely has longer run objectives, politicians don't—evidence is that get better policy outcomes Avoids political business cycle Less likely budget deficits will be inflationary Copyright © 2003 Pearson Education, Inc.

Explaining Central Bank Behavior Case against Fed may not be accountable Hinders coordination of monetary and fiscal policy Fed has often performed badly Copyright © 2003 Pearson Education, Inc.

Figure 6-4: Central Bank Independence and Macroeconomic Performance in 17 Countries Copyright © 2003 Pearson Education, Inc.