1302525952157_Chapter16_Instructor_Notes

1302525952157_Chapter16_Instructor_Notes - CHAPTER 16: THE...

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______________________________________________________________________________________ 326 CHAPTER 16: THE STRUCTURE OF CENTRAL BANKS: THE FEDERAL RESERVE AND THE EUROPEAN CENTRAL BANK A. T HE B ASICS In chapter 15, you learned about desirable characteristics of a central bank. In the current chapter, you are learning about how these characteristics are incorporated into two leading central banks, the Federal Reserve and the European Central Bank. How does the structure of each of these key central banks contribute to the achievement of the policy goals (low and stable inflation, high and steady real growth, stable financial markets, and stable interest rates and exchange rates) set out in chapter 15? In terms of the fundamentals of this course, how are the Fed and ECB structured, consistent with Core Principle 5, so that their policies attain welfare-enhancing economic stability? As you learn about the detail of central bank structure, from the mundane (say, the need to replace worn out currency with crisp new bills) to the sophisticated (how central banks engage in open market operations), keep in mind that the fundamental way this structure enhances economic welfare is by setting the conditions in which economic resources can be allocated to their most productive uses. That is, enhancing economic stability goes hand-in-hand with markets determining prices and allocating resources, which is Core Principle 4. So even though resource allocation (Core Principle 4) is in the background of this chapter, in many important ways price determination and resource allocation is the result of the real-world structure of central banks. B. S OLIDIFY Y OUR K NOWLEDGE DISCUSSION/EXTENSIONS OF THE BASICS Communications : Substantial time was spent in chapter 15 discussing the importance of the clear, unambiguous communication to the general public about monetary policy strategy and goals. Communication strategies include accountability – what the goals are and whether the central bank is achieving them – and transparency – clear presentation of the policy framework. In this chapter, key aspects of real-world implementation of these strategies are presented. Specifically, pay special attention to this chapter’s Tools of the Trade : Decoding the FOMC’s Statement on text page 407. Also informative is the later discussion of the ECB’s accountability and transparency, where an alternative method is described by which policy decisions are quickly communicated to the public. For example, in the U.S., the FOMC’s statement, especially the assessment of the risks facing the economy, receives enormous attention by financial market participants. Similar attention is paid in Europe to the ECB’s Governing Council’s statement on monetary
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Chapter 16: The Structure of Central Banks: The Federal Reserve and the European Central Bank 327 policy and the press conference at which this statement is presented. Paying particular attention to the discussion of these aspects of communications policies by central banks
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This note was uploaded on 09/07/2011 for the course ECO 412 taught by Professor Staff during the Spring '05 term at Kentucky.

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1302525952157_Chapter16_Instructor_Notes - CHAPTER 16: THE...

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