1. Euro Challenge Orientation: Monetary Policy Basics
Miami Branch
Euro Challenge Orientation:
Monetary Policy Basics
Wednesday, January 27, 2010

2. Disclaimer:
The views expressed are those of the presenter and do not necessarily reflect those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

3. History

4. History of the Fed 1791 – 1811: First Bank of the United States
Nation’s first Central Bank
Helps unify country’s economy
Faced major opposition
20 year charter not renewed
1816 – 1836: Second Bank of the United States
Serves same functions as First Bank
Financed debt from War of 1812
Bank President Nicholas Biddle and U.S. President Andrew Jackson at odds over bank
Central banking was not revived for more than 75 years

5. History of the Fed 1863: The National Banking Act was passed
Nationally-chartered banks
Bank notes backed by U.S. government securities
1913: Federal Reserve System Established
Nation’s third central bank
Banking Panic of 1907 raises need for central bank
Created safer and more stable monetary and banking system
The Fed has a 20 year charter, however, McFadden Act of 1927 gave Fed permanence

6. History of the ECB 1952: The European Coal & Steel Community
Founding members were Belgium, Germany, France, Italy, Luxembourg and the Netherlands Bank
To withdraw resources used for war to preserve peace
1958: European Economic Community and European Atomic Energy Community (Euratom)
1967: European Communities (now known as the European Union)
ECSC, EEC and Euratom merged
Joint decisions and policies for many industries

7. History of the ECB 1988: European Council confirmed EMU
EC central bank governors formed a committee of monetary policy experts
Resulted in the Delors report that details a three step program to achieve EMU
1992: Treaty on European Union
Established the European Union
Added chapter on monetary and economic policy
1999: European Central Bank opened
Currency among initial 11 member banks was fixed
Single monetary policy
2002: Introduction of Euro Currency and Coin

8. Structure and functions

9. Federal Reserve System
Structure
The Board of Governors
12 Federal Reserve Banks
24 Branches
European Central Bank
Structure
Executive Board
16 Eurosystem Banks (have adopted the euro)
27 EU Member Central Banks

13. Federal Reserve Board of Governors European Central Bank
Seven members
Appointed by U.S. president and confirmed by the Senate
Staggered, 14-year terms
Ben Bernanke, Chairman
European Central Bank
Executive Board
Six members
Appointed by the Heads of State of member countries
8 year term
Jean Claude Trichet, President

14. Federal Reserve Goal European Central Bank Goal
To promote economic growth, stable prices and maximum employment.
Why? Multiple bank failures throughout history due to inflexible financial system & periods of high unemployment
European Central Bank
Goal
To maintain price stability
Why? Due to Germany’s hyperinflation in the 1920’s with the issuance of the 50 million Mark note

15. Federal Reserve Primary Functions European Central Bank
Conduct monetary policy
Supervise and regulate the banking system
Provide payment services
European Central Bank
Primary Functions
Conduct monetary policy
Conducting foreign exchange operations
Promote an efficient payment system
Hold and manage foreign reserves

16. Federal Reserve Monetary Policy FOMC European Central Bank
The Seven Governors have voting authority
Five Reserve Bank Presidents have voting authority (New York and four others on a rotating basis)
The Seven non-voting Presidents participate fully in FOMC Meetings
The FOMC meets eight times per year
European Central Bank
Monetary Policy
Governing Council
Six members of the Executive Board
16 Governors of National Central Banks
Meet twice a month, first meeting to conduct monetary policy, second to discuss ECB management

17. Conclusion
Both central banks try to achieve broadly similar objectives even if their strategies are different.

18. Economic Indicators and statistics

19. Why do Central Banks use economic indicators?
Essential to making effective monetary policy
Both the U.S. dollar and Euro are fiat currencies
Value is not pegged to commodities, but rather to national wealth
If money supply is not proportionate to national wealth, then either inflation or deflation can result
M x V = P x Q
M = Supply of Money
V = Velocity of Money
P = Price levels
Q = Quantity of goods and services

20. Remember: M x V = P x Q How can a central bank affect the economy?
Let’s try a little simulation…
Remember:
M x V = P x Q
Which variable(s) are we adjusting?
What is the impact?

21. Gross Domestic Product - GDP
What is GDP?
Measures the total value of goods and services produced within a country in a given period
Also measures a country’s total income
What is growth rate?
The percent increase or decrease of GDP from a previous measurement cycle
Why use GDP per capital for cross country comparison?
Allows you to measure apples to apples

22. What are the components of GDP? Personal Consumption Expenditures
Investment
(I)
Government
(G)
Net Exports
(NX)
Fixed Investment
Inventories
Exports
Imports
Nonresidential
Residential
GDP = C + I + G + NX

23. Unemployment What does unemployment measure?
Measures the percent of those in the labor force (excluding discouraged workers) that are unemployed
Are there different types of unemployment?
Cyclical – unemployment rises with a downturn in the economy and rises when the economy improves
Frictional – individuals who are transitioning, entering the workforce for the first time or re-entering, usually voluntary
Structural – a mismatch between skills and availability of workers and vacancies in the job market.

24. Inflation and Deflation
What is inflation?
A situation in which the economy’s overall price level is rising
What is deflation?
A situation in which the economy’s overall price level is decreasing
What are the measures of inflation/deflation?
Consumer Price Index
Producer Price Index
Personal Consumption Expenditures Price Index

25. Inflation
The job of central banks is to keep inflation low by influencing the money supply.
This is accomplished by through open markets operations, setting interest rates and bank reserve requirements.

26. Comparison of Economies
Population
GDP*
GDP Growth Rate*
GDP per Capita*
Unemploy-ment Rate*
Inflation Rate*
Central Bank Discount Rate EU
491 MM
$14.69 T
1.5%
$33,800
7.2%
3.7%
2.0%
United States
303.8 MM
$14.58 T
1.4%
$48,000 0%
.25%
China
1.3 B
$7.8 T
9.8%
$6,100
4.0%
6.0%
5.31
Japan
127.8 MM
$4.48 T
70.0%
$35,300
4.2%
1.8%
0.1%
Germany
82.3 MM
$2.86 T
1.7%
$34,800
10.8%
2.8%
N/A
United Kingdom
60.9 MM
$2.27 T
1.1%
$37,400
5.5%
3.8%
Russia
140.7 MM
$2.22 T
$15,800
6.2%
13.9%
13.0%
France
64 MM
$2.09 T
0.9%
$32,700
7.5%
3.4%
Italy
58.1 MM
$1.8 T
0.0%
$31,000
6.8%
3.6%
Spain
40.4 MM
$1.37 T
1.3%
$34,100
10.9%
4.4%
*2008 estimates
Ref:

27. ECB Member Countries Population GDP* GDP Growth Rate* GDP per Capita*
Population
GDP*
GDP Growth Rate*
GDP per Capita*
Unemploy-ment Rate*
Inflation Rate* EU
491 MM
$14.69 T
1.5%
$33,800
7.2%
3.7%
Germany
82.3 MM
$2.86 T
1.7%
$34,800
10.8%
2.8%
France
64 MM
$2.09 T
0.9%
$32,700
7.5%
3.4%
Italy
58.1 MM
$1.8 T
0.0%
$31,000
6.8%
3.6%
Spain
40.4 MM
$1.37 T
1.3%
$34,100
10.9%
4.4%
Netherlands
16.6 MM
$687 B
2.1%
$41,300
4.6%
2.6%
Belgium
10.4 MM
$398 B
$38,300
7.0%
Greece
10 MM
$351 B
$32,800
8.0%
Austria
8.2 MM
$325 B
$39,600
Portugal
10.6 MM
$245 B
$22,000
7.6%
2.9%
Finland
5.2 MM
$201 B
2.4%
$38,400
6.5%
4.2%
Ireland
4.1 MM
$198 B
-0.7%
$47,800
6.2%
4.0%
Slovakia
5.4 MM
$123 B
$22,600
7.4%
4.7%
Slovenia
2 MM
$61 B
4.5%
$30,800
6.7%
6.0%
Luxembourg
486,006
$41 B
$85,100
Cyprus
792,604
$23 B
$29,200
3.8%
5.1%
Malta
403,532
$9 B
3.0%
$24,200
6.4%
*2008 estimates
Ref:

28. QUESTIONS