CH14: Central Banks and the Bank of Canada Flashcards
Easing of Monetary Policy
The lowering of the federal funds rate
Federal Funds Rate
The interest rate on overnight loans of deposits at the Federa Reserve
Federal Open Market Committee (FOMC)
The committee that makes decisions regarding the conduct of open market operations; composed of the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, the presidents of four other Federal Reserve banks (on a rotating basis).
Federal Reserve Banks
The 12 districk banks in the Federal Reserve System.
Instrument Independence
The ability of the central bank to set monetary policy instruments.
Open Market Operations
The Fed’s buying or selling of bonds in the open market
Political Business Cycle
A business cycle caused by expansionary policies that are pursued prior to an election.
Board of Governors of the Federal Reserve System
A board with seven governors (including the chair) that plays an essential role in decision making within the Federal Reserve System
Goal Independence
The ability of the central bank to set the goals of monetary policy
Tightening of Monetary Policy
An increase in the federal funds rate
Why does the Federal Reserve Bank of New York (FRBNY) play a special role in the Federal Reserve System ?
- The district (2nd) of the Federal Reserve Bank of New York (FRBNY) contains many of the largest commercial banks in the United States.
- The FRBNY houses the open market desk, which conducts open market operations - the purchase and sale of bonds - that determine the amount of reserves in the banking system; the foreign exchange desk, which conducts foreign exchange interventions on behalf of the Federal Reserve System and the U.S. Treasury.
- Proximity of the FRBNY to the New York and American Stock Exchanges.
- Only Federal Reserve Bank to be a member of the Bank for International Settlements (BIS) allowing the FRBNY to have a special role in international relations with other central banks and with private market participants.
- The president of the FRBNY is the only permanent member of the FOMC among the Federal Reserve bank presidents, serving as vice-chairman of the committee.
Eurosystem
The European Central Bank and national central banks of countries that have adopted the euro.
European Central Bank
The central bank of the sixteen euro area countries
What is the European System of Central Banks
The European System of Central Banks (ESCB) established under the Treaty on European Union (TEU) is made up of the European Central Bank (ECB) and the national central banks of all the Member States of the European Union (EU), regardless of whether or not they have adopted the euro.
What makes up the Federal Reserve System of the United States?
- The Board of Governors of the Federal Reserve System,
- The Federal Reserve Banks,
- The Federal Open Market Committee (FOMC),
- The Federal Advisory Council, and
- Approximately 2900 member commercial banks.
What makes the Bank of Canada different from the U.S. Federal Reserve and the European Central Bank?
The Bank of Canada has instrument independence
but not goal independence
instrument independence
the ability of the central bank to set monetary policy instruments
goal independence
the ability of the central bank to set the goals of
monetary policy
What kinds of independence does the European Central Bank and U.S. Federal Reserve have?
- Instrument independence
- Goal Independence
How many districts are there in the U.S. Federal Reserve system?
12
When did the Bank of Japan become formally independent of the government?
April 1998 under the new Bank of Japan Law
(Bank of Japan formely operated under the Ministry of Finance prior to April 1998)
What is the theory of bureaucratic behaviour?
the objective
of a bureaucracy is to maximize its own welfare
What is the strongest argument for an independent Bank of Canada?
Subjecting the Bank to more political pressures would impart an inflationary bias to monetary policy, creating a political business cycle.
Define Political Business Cycle
A cycle in which just before an election, expansionary
policies are pursued to lower unemployment and interest rates. After the election, the bad effects of these policies high inflation and high interest rates come home to roost, requiring contractionary policies that politicians hope the public will forget before the next election.
When and how was the Bank of Canada created?
The Bank of Canada was created by an act of Parliament in 1934 and began operations on March 11, 1935. Initially it was privately owned but became a Crown corporation in 1938
Who has overall responsibility for the operation of the Bank of Canada?
The overall responsibility for the operation of the Bank of Canada rests with a Board of Directors, consisting of the governor, the senior deputy governor, the deputy minister of finance, and twelve outside
directors. The Bank s governor is the chief executive officer and chairman of the Board of Directors.
When and why was the U.S. Federal Reserve created?
The Federal Reserve System was created in 1913 to lessen the frequency of bank panics. Because of public hostility to central banks and the centralization of power, the Federal Reserve System was created with many checks and balances to diffuse power.
Where is the European Central Bank based and when was it created?
The ECB is based in Frankfurt, Germany, and came into being on January 1, 1999.
open market buyback operations
The purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system
Exchange Fund Account
Holds the Canadian’s government’s foreign exchange reserves and is managed by the Bank of Canada. In particular, the Bank assists the Department of Finance in investing these foreign reserves and in borrowing when necessary to maintain an adequate level of reserves.
