7 central banks

425 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
425
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
8
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

7 central banks

  1. 1. Money, Banking and Financial Markets Central Banks Chahir Zaki Cairo University July, 2011Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 1 / 28
  2. 2. 1 The Task of the Central Bank2 The Aim of Central Bank Policy3 Central Bank Independence4 Instruments of Monetary Policy5 The Egyptian Case Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 2 / 28
  3. 3. Outline1 The Task of the Central Bank2 The Aim of Central Bank Policy3 Central Bank Independence4 Instruments of Monetary Policy5 The Egyptian Case Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 3 / 28
  4. 4. What is a Central BankThe central bank is an organization of the state. According to textbooksthe central bank is the monopoly of supplying the national currency; the lender of last resort; the bank of the state; the operator of the payments system of the country. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 4 / 28
  5. 5. Tasks of the Central Bank to issue currency; to supervise banks; to define and implement monetary policy; to conduct foreign exchange operations; to hold and manage official gold and foreign exchange reserves; to promote the smooth operation of the payments system; to compile and publish monetary statistics of the economy. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 5 / 28
  6. 6. Outline1 The Task of the Central Bank2 The Aim of Central Bank Policy3 Central Bank Independence4 Instruments of Monetary Policy5 The Egyptian Case Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 6 / 28
  7. 7. Objectives of Monetary Policy The main objective of monetary policy is to keep the price level stable. Why? In an economy where money is used as a medium of exchange, the following identity holds. M × vM = P × T where M money supply, vM velocity of money, P average price of a transaction, T number of transactions (per year). Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 7 / 28
  8. 8. Objectives of Monetary PolicyThe quantity theory of money can be developed from the previous identityadding some assumptions: The number of transactions is determined by the level of income and production in the economy. Thus, T can be replaced by Yr which is the real GDP. The velocity of money, vM , then becomes the income velocity of money, v The income velocity of money is constant (v = v ). ¯ Real GDP is determined by real variables only (e.g. availability of production factors, production technology). These determinants are rather stable in the short run. Yr is also constant in the short run ¯ (Yr = Yr ). M × v = P × Yr ¯ ¯ Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 8 / 28
  9. 9. Objectives of Monetary Policy The central bank and monetary policy An important finding from the quantity theory of money is that a change in money supply leads to a corresponding percentage change in the price level. Thus the organization that can control money supply should be in charge for keeping the price level stable. This is the central bank. Accordingly any change in money supply will lead in the long run only to a corresponding change in the price level. No other variable will be affected. This relation between money supply and the price level is why many central banks in charge for price stability carefully observe changes in money supply. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 9 / 28
  10. 10. Outline1 The Task of the Central Bank2 The Aim of Central Bank Policy3 Central Bank Independence4 Instruments of Monetary Policy5 The Egyptian Case Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 10 / 28
  11. 11. Why Central Bank Independence? The central bank is in charge for monetary policy. The aim of monetary policy is to keep inflation low. Keeping actual inflation low can be successful only when the central bank manages to keep the expected rate of inflation low. People expect the rate of inflation to be low only, when decision makers about monetary policy cannot gain from setting monetary policy so that inflation will be high. Borrowers gain from high inflation as inflation reduces the real burden of servicing debt. The government is the biggest debtor in the country. Thus the government gains from inflation. A central bank which is not independent from the government will find it hard to keep inflation low. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 11 / 28
  12. 12. Why Central Bank Independence? Politicians lack expertise about the complex relation between monetary policy, inflation and financial stability. Both a stable price level and financial stability are too important to leave it to people lacking expertise. Political business cycles may emerge when politicians in power (ab)use monetary policy before an election to make people reelect them. Counterargument to central bank independence: In a democracy, a powerful organization such as the central bank, should be under democratic control. An independent central bank may conduct monetary policy too ignorant to other aims of public policy. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 12 / 28
  13. 13. Elements of the Central Bank Independence Institutional independence: the central bank is an organization by itself (not a department of another institution). Personal independence: members of the monetary council must not be affiliated to any other institution. Goal independence: Ability of the central bank to set the goals of monetary policy. Instrumental independence: Ability of the central bank to set monetary policy instruments. Financial independence: the budget of the central bank is not to be approved by any other authority. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 13 / 28
  14. 14. Outline1 The Task of the Central Bank2 The Aim of Central Bank Policy3 Central Bank Independence4 Instruments of Monetary Policy5 The Egyptian Case Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 14 / 28
  15. 15. Instruments of Monetary PolicyThe instruments of monetary policy used by the Central Bank depend onthe level of development of the economy, especially its financial sector.They are classified as follows: Reserve Requirement: The Central Bank may require Deposit Money Banks to hold a fraction (or a combination) of their deposit liabilities (reserves) as vault cash and or deposits with it. Fractional reserve limits the amount of loans banks can make to the domestic economy and thus limit the supply of money. Open Market Operations: The Central Bank buys or sells ((on behalf of the Fiscal Authorities (the Treasury)) securities to the banking and non-banking public (that is in the open market). One such security is Treasury Bills. When the Central Bank sells securities, it reduces the supply of reserves and when it buys (back) securities-by redeeming them-it increases the supply of reserves to the Deposit Money Banks, thus affecting the supply of money. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 15 / 28
  16. 16. Instruments of Monetary Policy Lending by the Central Bank: The Central Bank sometimes provide credit to Deposit Money Banks, thus affecting the level of reserves and hence the monetary base. Exchange Rate: The balance of payments can be in deficit or in surplus and each of these affect the monetary base, and hence the money supply in one direction or the other. By selling or buying foreign exchange, the Central Bank ensures that the exchange rate is at levels that do not affect domestic money supply in undesired direction, through the balance of payments and the real exchange rate. The real exchange rate when misaligned affects the current account balance because of its impact on external competitiveness. Discount Rate: Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 16 / 28
  17. 17. Outline1 The Task of the Central Bank2 The Aim of Central Bank Policy3 Central Bank Independence4 Instruments of Monetary Policy5 The Egyptian Case Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 17 / 28
  18. 18. The Egyptian Case: ObjectivesEgypt’s Monetary Policy Objective Law No. 88 of 2003 of the “CentralBank, Banking Sector and Monetary System”: entrusts the Central Bankof Egypt (CBE) with the formulation and implementation of monetarypolicy, with price stability being the primary and overriding objective. TheCBE is committed to achieving, over the medium term, low rates ofinflation which it believes are essential for maintaining confidence and forsustaining high rates of investment and economic growth. TheGovernment’s commitment to fiscal discipline is important to achieve thisobjective. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 18 / 28
  19. 19. The Egyptian Case: Interest Rates What is the Interest Rate Corridor? On June 2, 2005 the CBE introduced an interest rate corridor, two standing facilities, the overnight lending and the overnight deposit facility. The interest rates on the two standing facilities, the overnight lending and the overnight deposit rates, define the ceiling and floor of the corridor, respectively. By setting the rates on the standing facilities, the MPC determines the corridor within which the overnight rate can fluctuate. Effectively, steering the overnight inter-bank rate within this corridor is the operational target of the CBE. What are the merits of the Corridor? Since the corridor was introduced in June 2005, volatility in the overnight inter-bank rate declined significantly. Who decides on the Corridor? The Monetary Policy Committee (MPC) decides on the corridor rates. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 19 / 28
  20. 20. The Egyptian Case: MPC What is the Monetary Policy Committee (MPC)? Monetary policy decisions are taken by the CBE’s Monetary Policy Committee (MPC), which consists of nine members comprising of the Governor of the CBE, the two Deputy Governors, and six members of the Board of Directors. How often does the MPC meet? The MPC convenes on Thursday every six weeks. The annual schedule of the MPC meetings is posted on the CBE’s web-page at “Monetary Policy¿Monetary Policy Decisions¿MPC Meeting Schedule” Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 20 / 28
  21. 21. The Egyptian Case: MPC How does the MPC decide on the interest rate? The Monetary Policy Department prepares briefing material for the MPC ahead of each meeting. This material is analytical in content and focuses on both domestic and international developments. On the domestic front, the following variables are monitored: inflation, interest rates, monetary and credit developments, asset prices, and the real sector variables. Moreover, inflation forecasts based on the CBE’s forecasting models are presented every quarter. On the external side, several variables are examined closely, including global growth, global interest rates, international commodity prices, global inflation, in addition to many other variables. Does the MPC justify its policy actions? Yes, the CBE publishes a press release after each MPC. It is accessible at “Monetary policy¿Monetary Policy Decisions¿MPC Press Releases” Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 21 / 28
  22. 22. The Egyptian Case: Inflation What is meant by the consumer price index (CPI)? It is a price index, published by the Central Agency for Public Mobilization and Statistics (CAPMAS) every month on www.capmas.gov.eg, capturing weighted price movements of consumer goods and services which constitute a representative “consumption basket” purchased by households. The weights in the basket reflect the relative importance of the goods and services in the household consumption basket based on the Household Expenditure Survey, which is carried out by CAPMAS every five years. This index is commonly referred to as the headline CPI. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 22 / 28
  23. 23. The Egyptian Case: Inflation What is meant by headline CPI inflation? It is a general increase in the price level of consumer goods and services contained in the household consumption basket over time. While the annual inflation rate captures the inflation story over the whole year, the monthly inflation rate contains the most recent developments. What is meant by core CPI inflation? And how is it different from the headline CPI inflation? Core CPI is a variant of the headline CPI that excludes the impact of temporary price shocks on inflation that could result for various reasons, including weather conditions, supply disruptions or infrequent resetting of prices by the government. Does the core inflation measure replace the headline measure? No, the core measure is derived from the headline and is used as a complementary indictor, mainly to distinguish the underlying trend of the inflation rate from its transitory movements. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 23 / 28
  24. 24. The Egyptian Case: Inflation Why use core inflation measure? Temporary and sudden movements in the prices of some CPI components cause the headline inflation rate to experience sharp fluctuations. The volatility caused by temporary price shocks can make it difficult for policymakers to accurately distinguish between price changes that are likely to be persistent which, in turn, have implications for future inflation trends, and those which are temporary. The core measure provides a mean by which the monetary authority can separate the noise and short-run fluctuations in the incoming data from the more persistent trend which provides signals about current and future inflation. By timely communicating the core inflation measure, the CBE aims to improve the public’s understanding of the inflation dynamics. This is expected to reduce the pass-through of temporary price shocks to inflation expectations and, in turn, minimize the variability in inflation. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 24 / 28
  25. 25. ercent (m/m) in May. The annual rate inched up to 8.94 per‐ The Egyptian Case: Inflation Meanwhile, retail prices witnessed a marginal increase while  Headline and Core CPI Inflation 1/ 25.0 (year-on-year percentage change ) 25.0 20.0 20.0 15.0 15.0 10.0 10.0 5.0 5.0 Headline CPI - All Items (100%) Core CPI excl. regulated items, fruits & vegetables (74.43%) 0.0 0.0 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11Jun-11 Source: CAPMAS and the CBE       Contributions to Monthly Headline CPI Inflation (in percent) Chahir Zaki (Cairo University) 3.0 Money, Banking and Financial Markets July, 2011 25 / 28
  26. 26.           Central Bank of Egypt  The Egyptian Case: Inflation           Monthly Inflation Developments                                                                                                                                 Table 2.   Consumer Price Index and Major Components 1/  Weight in June 2011 to May June 2011 to June June 2010 June 2011 basket 2/ 2011 2010 (in percent) (index) (percentage change) (January 2010 = 100) Headline - All items 100.00 102.44 114.51 0.42 11.79 Food and beverages 39.92 105.86 126.01 0.13 19.03 Tobacco and related products 2.19 100.00 169.86 10.16 69.86 Clothing and footwear 5.41 100.00 102.23 0.42 2.23 Housing, water, electricity, gas and other fuels 18.37 99.30 100.42 0.00 1.12 Furnishings, household equipment and routine maintenance of the dwelling 3.77 102.60 105.16 0.25 2.50 Medical care 6.33 100.00 101.93 0.00 1.93 Transportation 5.68 100.65 101.66 0.00 1.00 Communications 3.12 99.87 99.99 -0.04 0.12 Recreation and Culture 2.43 102.38 108.42 0.56 5.90 Education 4.63 100.00 124.31 0.00 24.31 Hotels, cafes and restaurants 4.43 100.23 112.37 0.00 12.11 Miscellaneous goods and services 3.73 100.70 103.15 0.55 2.44 Selective aggregates Fruits & vegetables 3/ 6.90 108.91 150.20 -2.30 37.92 Regulated items 18.66 99.59 112.49 1.66 12.95 Food excl. fruits & vegetables 31.08 105.55 122.07 0.82 15.65 Chahir Zaki (Cairo items Retail University) Money, Banking and Financial Markets 14.48 101.05 103.76 0.35 July, 2011 2.68 26 / 28
  27. 27. Furnishings, household equipment and routine maintenance of the dwellingThe Egyptian Case: Inflation Medical care 3.77 6.33 102.60 100.00 105.16 101.93 0.25 0.00 2.50 1.93 Transportation 5.68 100.65 101.66 0.00 1.00 Communications 3.12 99.87 99.99 -0.04 0.12 Recreation and Culture 2.43 102.38 108.42 0.56 5.90 Education 4.63 100.00 124.31 0.00 24.31 Hotels, cafes and restaurants 4.43 100.23 112.37 0.00 12.11 Miscellaneous goods and services 3.73 100.70 103.15 0.55 2.44 Selective aggregates Fruits & vegetables 3/ 6.90 108.91 150.20 -2.30 37.92 Regulated items 18.66 99.59 112.49 1.66 12.95 Food excl. fruits & vegetables 31.08 105.55 122.07 0.82 15.65 Retail items 14.48 101.05 103.76 0.35 2.68 Paid services 5.87 100.00 109.55 0.00 9.55 Other services 23.00 100.09 103.28 0.06 3.19 Core CPI 74.43 102.55 111.71 0.45 8.94 1/ Source: CAPMAS and CBE calculations 2/ Based on 2008/2009 Household Expenditure Survey 3/ Excluding pulses, processed vegetables and dried fruits                 Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 27 / 28
  28. 28. References Mishkin, chapter 4. The Central Bank of Egypt website. Chahir Zaki (Cairo University) Money, Banking and Financial Markets July, 2011 28 / 28

×