1. CENTRAL BANK
Lecturer:
Prof. Insukindro, Ph.D

2. 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

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

4. 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

5. 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

6. Central Bank’s role in the flow of funds6
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,

7. Key Services Provided by the Financial System7
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

8. 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

9. 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.

10. 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

11. 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

12. Frisell et al (2004)

13. Frisell et al (2004)

14. Frisell et al (2004)

15. Frisell et al (2004)

16. 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)

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

18. 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)

19. Frisell et al (2004)

20. Frisell et al (2004)

21. 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).

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

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

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

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

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

27. Financial Institutions in China
Source:
Gang ,1994: 37

28. 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 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