Chapter 16 - Chapter 16-Central Banks and the Federal...

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Chapter 16-Central Banks and the Federal Reserve System The Price Stability Goal •Definition: Low and stable inflation •Inflation –Creates uncertainty and difficulty in planning for the future (especially if it’s rising) –Lowers economic growth (if there’s uncertainty) –Strains social fabric •Nominal anchor to contain inflation expectations •Time-inconsistency problem Other Goals of Monetary Policy •High employment •Economic growth •Stability of financial markets •Interest-rate stability •Foreign exchange market stability Should Price Stability be the Primary Goal? •In the long run there is no conflict between the goals •In the short run it can conflict with the goals of high employment and interest-rate stability •Hierarchical mandate •Dual mandate Origins of the Federal Reserve System •Resistance to establishment of a central bank –Fear of centralized power –Distrust of moneyed interests •No lender of last resort –Nationwide bank panics on a regular basis –Panic of 1907 so severe that the public was convinced a central bank was needed •Federal Reserve Act of 1913 –Elaborate system of checks and balances –Decentralized Federal Reserve Banks
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•Quasi-public institution owned by private commercial banks in the district that are members of the Fed system •Member banks elect six directors for each district; three more are appointed by the Board of Governors –Three A directors are professional bankers –Three B directors are prominent leaders from industry, labor, agriculture, or consumer sector –Three C directors appointed by the Board of Governors are not allowed to be officers, employees, or stockholders of banks •Member banks elect six directors for each district; three more are appointed by the Board of Governors (cont’d) –Designed to reflect all constituencies of the public
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