Banking, Centrally

Banking, Centrally EC6012 International Monetary Economics Lecture 6 Stephen Kinsella Dept. Economics, University of Limerick. stephen.kinsella@ul.ie March 9, 2009 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 1 / 16

Today Course Design 1 History 2 Central Bank Design 3 Central Bank Functions 4 Open Market Operations 5 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 2 / 16

Course Design Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 3 / 16

Nice Quote Recurring financial crises have become a hallmark of the modern financial system. It would seem that, every five years or so, a 100-year event destabilizes the system. Moreover, each crisis appears more violent than the previous one. –Philipp M. Hildebrand, Is Basel II Enough? The Benefits of a Leverage Ratio Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 4 / 16

Basic Ideas Lovely books: Minsky (1986), Davies (1994), Zelitzer (1994) Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 5 / 16

Basic Ideas Lovely books: Minsky (1986), Davies (1994), Zelitzer (1994) History of the ‘Big Bank’ Concept Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 5 / 16

Basic Ideas Lovely books: Minsky (1986), Davies (1994), Zelitzer (1994) History of the ‘Big Bank’ Concept The Bank of England as a Template CB Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 5 / 16

Basic Ideas Lovely books: Minsky (1986), Davies (1994), Zelitzer (1994) History of the ‘Big Bank’ Concept The Bank of England as a Template CB The Bundesbank → ECB Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 5 / 16

Bank of England Of all institutions concerned with economics none has for so long enjoyed such prestige. It is, in all respects, to money as St. Peters is to the Faith. And the reputation is deserved, for most of the art as well as much of the mystery associated with the management of money originated there. –J. K. Galbraith (1975, pg. 30) Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 6 / 16

Functions of Any CB Clear cheques 1 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Administer and make discount loans to banks in their regions 4 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Administer and make discount loans to banks in their regions 4 Evaluate proposed mergers and applications for banks and other 5 ﬁnancial intermediaries to expand their activities Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Administer and make discount loans to banks in their regions 4 Evaluate proposed mergers and applications for banks and other 5 ﬁnancial intermediaries to expand their activities Act as liaisons between the business community and the monetary 6 policy community. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Administer and make discount loans to banks in their regions 4 Evaluate proposed mergers and applications for banks and other 5 ﬁnancial intermediaries to expand their activities Act as liaisons between the business community and the monetary 6 policy community. Examine bank holding companies and state-chartered member banks 7 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Administer and make discount loans to banks in their regions 4 Evaluate proposed mergers and applications for banks and other 5 ﬁnancial intermediaries to expand their activities Act as liaisons between the business community and the monetary 6 policy community. Examine bank holding companies and state-chartered member banks 7 Collect data on local business conditions 8 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Functions of Any CB Clear cheques 1 Issue new currency 2 withdraw damaged currency from circulation 3 Administer and make discount loans to banks in their regions 4 Evaluate proposed mergers and applications for banks and other 5 ﬁnancial intermediaries to expand their activities Act as liaisons between the business community and the monetary 6 policy community. Examine bank holding companies and state-chartered member banks 7 Collect data on local business conditions 8 Use their staﬀs of professional economists to research topics related 9 to the conduct of monetary policy. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 7 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 To support the general economic policies in the Community. 2 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 To support the general economic policies in the Community. 2 To deﬁne and implement the monetary policy of the Community. 3 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 To support the general economic policies in the Community. 2 To deﬁne and implement the monetary policy of the Community. 3 To conduct foreign exchange operations. 4 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 To support the general economic policies in the Community. 2 To deﬁne and implement the monetary policy of the Community. 3 To conduct foreign exchange operations. 4 To hold and manage the oﬃcial foreign reserves of the member states. 5 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 To support the general economic policies in the Community. 2 To deﬁne and implement the monetary policy of the Community. 3 To conduct foreign exchange operations. 4 To hold and manage the oﬃcial foreign reserves of the member states. 5 To promote the smooth operation of payments systems 6 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Task of ECB The main tasks of the Eurosystem set out in Article 105 of the EC Treaty are: To maintain price stability. 1 To support the general economic policies in the Community. 2 To define and implement the monetary policy of the Community. 3 To conduct foreign exchange operations. 4 To hold and manage the official foreign reserves of the member states. 5 To promote the smooth operation of payments systems 6 To contribute to ‘the smooth conduct of policies pursued by the 7 competent authorities relating to the prudential supervision of credit institutions, and the stability of the financial systems. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 8 / 16

Money Supply Coordination Figure: Simple domestic demand and supply of money with a ﬁxed money supply.16 Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 9/

Structure of CB’s Operations Figure: Structure of Central Bank’s Operations. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 10 / 16

CB Balance Sheet Assets(Uses of Funds) Liabilities (Sources of Funds) Govt. Securities Currency in Circulation Discount Loans Reserves Table: Central Bank’s Balance Sheets Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 11 / 16

Control The central controls the level of money in the economy by manipulating the monetary base, MB which is the level of currency in circulation, C , plus the total reserves in the banking system, R. The Federal reserve, for example, directly manipulates the relationship MB = C + R (1) Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 12 / 16

OMOs Figure: Causal structure of open market operations. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 13 / 16

Expansionary OMO Figure: An expansionary open market operation. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 14 / 16

Next Time Theories of Interest Rate Determination. See Readings on the Web. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 15 / 16

References Glyn Davies. A History of Money: From Ancient Times to the Present Day. University of Wales Press, Cardiﬀ, 1994. J. K. Galbraith. Money: Whence it Came, Where it Went. Houghton Miﬄin Co., Boston, 1975. Hyman P. Minsky. Stabilising an Unstable Economy. McGraw-Hill, New York, 1986. Viviana A. Zelitzer. The Social Meaning of Money. Basic Books, New York, 1994. Stephen Kinsella (University of Limerick) Banking, Centrally March 9, 2009 16 / 16

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Banking, Centrally

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