Term
| The two main reasons of resistance of an American central bank |
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Definition
1. Fear of Centralized Power (shown in checks and balances of Constitution)
2. Traditional American distrust of moneyed interests |
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Term
| What was the ultimate purpose of the creation of a central bank in the US |
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Definition
There was no lender of last resort
- Nationwide bank panics occurred on a regular basis
- Panic of 1907 was so severe it convinced the people it was needed |
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Term
| Federal Reserve Act of 1913 |
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Definition
Wrote by Congress, contained an elaborate set of checks and balances to decentralize power
- Created the Federal Reserve System and its 12 regional Federal Reserve banks |
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Term
| The different entities of the Federal Reserve system |
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Definition
The Federal Reserve banks
Board of Governors of the Federal Reserve
The Federal Open Market Committee (FOMC)
The Federal Advisory Council
2500 member commercial banks |
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Term
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Definition
| Quasi-public institution owned by private commercial banks in the district that are members of the Fed system |
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Term
| Federal Reserve bank directors |
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Definition
Member banks elect 6 for each district, 3 more are appointed by the Board of Governors
A - 3 are professional bankers
B - 3 are prominent leaders from industry, labor, agriculture, or consumer sector
C - 3 that are appointed by Board of Governors can't be officers, employees, or stockholders of banks
- This is designed to reflect all constituencies of the public |
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Term
| Who appoints the president of the different federal reserve banks? |
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Definition
| 6 directors, ecluding the 3 class A |
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Term
| 9 Functions of the Federal Reserve Banks |
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Definition
1. Clear checks
2. Issue currency
3. Withdraw damaged currency from circulation
4. Administer and make discount loans to banks in their districts
5. Evaluate proposed mergers and applications for banks to expand their activities
6. Act as liaisons between the business community and the Federal Reserve System
7. Examine bank holding companies and state-chartered member banks
8. Collect data on local business conditions
9. Use staffs of professional economists to research topics related to the conduct of monetary policy |
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Term
| How do Federal Reserve Banks affect Monetary Policy? |
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Definition
1. Directors "establish" the discount rate
2. Decide which banks can obtain discount loans
3. Directors select 1 commercial banker to serve on the Federal Advisory Council which consults with the Board of Governors and provides info to help conduct monetary policy
4. 5 of the 12 presidents have a vote in the FOMC (always contains the president of the New York Fed) |
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Term
| Which Federal reserve banks are the biggest? |
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Definition
New York- 25% of assets
- Chicago
- San Francisco |
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Term
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Definition
| The purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system) |
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Term
| Who are the member banks of the Federal Reserve System |
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Definition
-All national banks
-Commercial banks chartered by states are not required but may choose to be members (about 1/3 are) |
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Term
| Depository Institutions Deregulation and Monetary Control Act of 1980 |
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Definition
| Subjected all banks to the same reserve requirements as member banks and gave all banks access to Federal Reserve facilities |
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Term
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Definition
- 7 members headquartered in Washington D.C.
- Appointed by President and approved by Senate
- 14 year non-renewable term
- Required to come from different districts
- Chairman is chosen by governors and serves a 4 year renewable term |
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Term
| 4 Responsibilities of the Board of Governors in regards to Monetary Policy |
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Definition
1. Vote on the conduct of Open Market Operations (members of FOMC)
2. Sets reserve requirements
3. Controls the discount rate by the "review and determination" process (approves or disapproves of discount rate "established" by Federal Reserve Banks)
4. The Chairman of the Board advises the President on economic policy, testifies in Congress, and speaks for the Federal Reserve System |
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Term
| 5 Responsibilities of Board of Governors not dealing with Monetary Policy |
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Definition
1. Sets margin requirements
2. Sets salaries of president and officers of each Federal Reserve Bank and reviews each bank's budget
3. Approves bank mergers and applications for new activities
4. Specifies the permissible activities of bank holding companies
5. Supervises the activities of foreign banks in the US |
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Term
| Responsibilities of the Chairman of the Board |
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Definition
-Advises the president on economic policy
-Testifies in Congress
-Speaks for the Federal Reserve System to the media
-May represent the US in negotiations with foreign governments on economic matters |
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Term
| Federal Open Market Committee |
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Definition
- Meets 8 times per year
- Consists of 7 members of Board of Governors, President of NY Fed and presidents of 4 other Fed banks
- Chaired by Chairman of the Board of Governors
- Issues directives to the trading desk at the Federal Reserve Bank of NY |
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Term
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Definition
1. Report by the manager of system of open operations on foreign currency and domestic open market operations and other related issues
2. Presentation of Board's staff national economic forecast
3. Outline of different scenarios for monetary policy actions
4. Presentation on relevant Congressional actions
5. Public Announcement about the outcome of the meeting |
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Term
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Definition
The interest rate on overnight loans from one bank to another
- Raising it is "tightening of monetary policy"
- Lowering is "easing of monetary policy" |
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Term
| Why the Chairman of the Board of Governors really runs the show |
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Definition
1. Spokesperson for the Fed and negotiates with Congress and the President
2. Sets the agenda for meetings
3. Speaks and votes first about monetary policy
4. Supervises professional economists and advisers |
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Term
| 4 Principles of Central Bank Design |
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Definition
Independence
Decision-making by committee
Transparency
Accountability |
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Term
| Instrument and goal independence |
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Definition
Instrument- The ability of the Central Bank to set monetary policy instruments
Goal- The ability of the central bank to set the goals of monetary policy |
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Term
| How independent is the Fed? |
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Definition
- Has instrument and goal independence
- Has its own independent revenue
- Fed's structure is written by Congress, and is subject to change at any time
- Presidential influence
1. Influence on Congress
2. Appoints members
3. Appoints chairman although terms are not concurrent (may have a chairman from a previous administration) |
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Term
| Basic case for Fed independence |
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Definition
| The view that subjecting it to more political pressures would impart an inflationary bias to monetary policy |
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Term
| Basic case against Fed independence |
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Definition
| Proponents of a Fed under the control of the president or Congress argue that it is undemocratic to have monetary policy controlled by an elite group that is responsible to no one |
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Term
| The case for Fed independence |
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Definition
-Political pressure would impart an inflationary bias to monetary policy (political pressure would try to cut interest rates too often)
-Political business cycle- Depending on how close we are to an election, we see an increase or decrease in interest rates
- Could be used to facilitate Treasury financing of large budget deficits
- Too important to leave to politicians-the principal-agent problem is worse for politicians |
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Term
| What is the core conflict in the Fed's case for independence |
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Definition
The economy is a driver of election results
The winner of almost every election can be explained by:
- The incumbent advantage
- The negative effect of inflation
- The positive effect of strong economic growth |
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Term
| What matters for an incumbent when the election rolls around? |
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Definition
Not economic growth over the entire term, but in the year of the election
Inflation is a lagging indicator
- When the Fed eases, the positive effects (stronger growth) happens quickly, while inflation comes later |
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Term
| The 4 reasons in the case against independence |
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Definition
Undemocratic
Unaccountable
Difficult to coordinate fiscal and monetary policy
Has not used its independence successfully |
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Term
| Who usually gets blamed for a poor economy? |
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Definition
The Fed
- Used as a scapegoat for politicians |
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Term
| Theory of bureaucratic behavior |
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Definition
Objective is to maximize its own welfare which is related to power and prestige
- Fight vigorously to preserve autonomy
- Avoid conflict with more powerful groups |
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Term
| What type of macro impact does the Fed have? |
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Definition
Very little in terms of politics- At the heart of it is the role of inflation expectations
- Do not have long-term impact on the employment rate or distribution of income |
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Term
| How can politicians promote lower unemployment and income redistribution? |
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Definition
Unemployment- Use legislation that increases incentive to work or helps match workers to jobs
Redistribution- Use tax and welfare policy |
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Term
| What is the Fed a creature of? |
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Definition
Congress
- 7 governors are appointed by President, confirmed by Senate
- 2/3 Senate vote can impeach a governor
- Regional fed presidents are nominated by local board of directors and then approved by BOG |
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Term
| Measure of Fed's Independence |
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Definition
- Officials have longer appointments (governors have 14-year terms)
- Fed reports to Congress periodically, but its daily actions are not subject to review by other branches of government
- Fed does not have any obligation to finance budget deficit
- Fed is self-financing through interest earned on its portfolio of gov't securities |
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Term
| How does Congress apply political pressure points to the Fed |
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Definition
4 testimonies per year (2 to House, 2 to Senate)
- Congress wants to understand what the Fed is doing and what's happening in the economy and financial markets
-- very inefficient meetings, few questions |
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Term
| 2 important President-Chairman relationships |
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Definition
1. Reagan-Volker - Reagan adhere to Friedman's view about Central Banking and concentrated on supply-side economics to decrease inlation
2. Bush senior- Greenspan - Rejection of the modern model of inflation- if inflation accelerates then just take it back to ease |
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Term
| 5 Principles of central bank design |
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Definition
Independence
Decision-making by committee
Policy Framework
Accountability
Transparency |
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Term
| How does the Fed represent Decision-making by committee? |
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Definition
| Pooling the knowledge of a number of people yields better decisions than decision making by an individual (FOMC) |
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Term
| How does the Fed represent Policy Framework? |
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Definition
| "The BOG of the Federal Reserve System and FOMC maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term rates" |
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Term
| How does the Fed represent Accountability |
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Definition
| Policymakers must be held accountable to the public they serve |
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Term
| How does the Fed represent Transparency |
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Definition
Policymakers must clearly communicate the objectives, decisions, and methods to the public
Fed: Monetary Policy Report to Congress |
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Term
| Structure and Independence of the European Central Bank |
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Definition
- Patterned after the Fed
- Central banks from each country play similar roles as Fed banks
- Exec Board
--- President, vice-president, and 4 other members
--- Eight year, non-renewable terms
- Governing Council |
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