The Conduct of Monetary Policy

The Conduct of Monetary Policy - Monetary Policy ECON 3381...

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Monetary Policy ECON 3381 A. Hales Fall 2010
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The Fed The Federal Reserve System (Fed) is the central bank of the United States. It is not a private/citizen’s bank. Functions of Central Banks Clearing payments: clear checks and process electronic payments; “bank’s bank” Conduct monetary policy: manage the money supply in the nation’s best interest Lending: lend money to private banks
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The Structure of the Fed Fed Member Banks 12 District Banks (Regional) Fed Board of Governors Includes: 1. Boston 2. New York 3. Philadelphia 4. Cleveland 5. Richmond 6. Atlanta 7. Chicago 8. St. Louis 9. Minneapolis 10. Kansas City 11. Dallas 12. San Francisco
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Board of Governors 7 members appointed by the President and confirmed by the Senate Each member serves a nonrenewable 14 year term with one governor’s term expiring every other January. The Chairman is chosen from among the 7 governors and serves a four-year term. Currently, the Fed Chairman is Ben Bernanke.
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Board of Governors Responsibilities include: Making decisions on monetary policy Chairman serves as the President’s advisor on economic policy, Chairman may represent the U.S. in negotiations with foreign governments Sets margin requirements Has substantial regulatory functions Supervises the activities of foreign banks in the United States
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Federal Reserve Banks 12 district banks that are quasi-public institutions owned by the private commercial banks in the district. Commercial banks must purchase stock in the district Federal Reserve bank as part of their membership requirements. By law, they are paid dividends that are limited to 6%. Each district bank has 9 directors who must be approved by the Board of
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Federal Reserve Banks Responsibilities include: Clear checks Issue new currency Withdraw damaged currency from circulation Administer and make discount loans to banks in their districts Evaluate proposed mergers and applications for banks to expand their activities. Act as liaison between the business
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Member Banks All national banks are required to be members of the Fed. State banks are not required to be members but they can become members if they meet certain requirements. Member and non-member banks must keep reserves with the Fed, have access to the discount window, and have access to Fed check clearing.
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Fed independence 2 types of independence Instrument independence: ability to set monetary policy instruments Goal independence: ability to set the goals of monetary policy Fed is fairly independent by both measures. They raise revenue through their holdings of securities and their loans to banks so they are not subject
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Fed independence: Should the Fed be independent? Proponents of independence argue:
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The Conduct of Monetary Policy - Monetary Policy ECON 3381...

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