chap016 - Chapter 16 The Structure of Central Banks The...

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Chapter 16 The Structure of Central Banks: The Federal Reserve and the European Central Bank Chapter Overview In this chapter we examine two important central banks, the U.S. Federal Reserve System and the European Central Bank, and see how their structure helps them to meet their objectives. Reading this chapter will prepare students to: Understand the structure of the U.S. central bank, the Federal Reserve System; Explain the structure of the FOMC and articulate its important role in conducting monetary policy; Understand the structure of the European Central Bank and compare it to that of the Fed; Assess the criteria used in judging the success of modern central banks. Important Points of the Chapter The instability and chaos that accompany financial panics damage more than just the banks that are directly involved; everyone is slow to regain confidence in the financial system after a panic, making it hard for anyone to obtain financing. The more frequent the panics the worse the situation gets, and the slower the economy grows. The punishing effects of frequent financial panics led people to reconsider the merits of a powerful central bank. For Europe in the 20 th century, however, central banking was not enough, and leaders came to believe that the only way to ensure both political and economic stability was to forge closer ties among the continent’s countries. This led to the European monetary union, with its common currency (the euro) and its central bank (the European Central Bank, or ECB). Application of Core Principles Principle #5: Stability (page 377) The Board of Directors of each Federal Reserve Bank is made up of bankers but also of business leaders and others that represent the public interest. Though the range of views represented is wide, everyone has an interest in ensuring economic and financial stability. Principle #3: Information (page 385) The FOMC releases huge amounts of information to the public, but lots of information isn’t always the right information. There is no regular press conference or questioning of the Chair on the FOMC’s current policy stance and some information is released at varying amounts of time after the meeting. 224 Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets
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Chapter 16 The Structure of Central Banks: The Federal Reserve and the European Central Bank Principle #5: Stability (page 386) Fed officials state that they strive to attain “price stability and maximum sustainable economic growth” but do not specify what is meant by either term. Principle #3: Information (page 391) Like the Federal Reserve, the ECB distributes large volumes of information, both on paper and on its website, but the most important aspect of the ECB’s communication strategy concerns statements about the Governing Council’s policy deliberations. Unlike the FOMC there is a press conference and transcripts are made immediately available. Principle #5:
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This note was uploaded on 02/12/2012 for the course ECON 101 taught by Professor Abrams during the Spring '11 term at Adams State University.

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chap016 - Chapter 16 The Structure of Central Banks The...

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