L21 - Money and Monetary Institutions: Central Banks

Question 1

What are the general functions of Central Banks?

Answer 1

• Maintain stability and contain systemic risk
• Provide financial services to depository institutions,the
  govt and foreign official offices
• Play major role in operating nation’s payments system

Question 2

What do central banks aim to achieve?

Answer 2

• High level of employment
• Stable prices
• Moderate long-term interest rates
• Exchange rate stability

Question 3

What are considered to be the day to day functions of central banks?

Answer 3

• Manage payments system
  `
• Provide loans during time of financial stress (lender of
  last resort) (can be seen as moral hazard)
• Oversee commercial banks and financial system to
  ensure confidence in their soundness (Regulatory
  Oversight)
  (Taken away from BoE 1990’s, given back after
  financial crash 2008)

Question 4

What can central banks do as a monopolist?

Answer 4

• Fix quantity of money supply in economy (can only
  affect narrow money) (Allows commercial banks
  compete for money creating interest rate)
• Fix the rate of interest and supply any quantity of
  reserves needed to maintain it

Modern banks do the 2nd

Question 5

What is a mandate and a dual mandate for central banks?

Answer 5

List of things need to do/achieve.

i. e BoE: Single mandate (2% inflation)
i. e ECB & Fed Dual Mandate (Inflation and Employment)

Question 6

What is the monetary policy transmission?

Answer 6

When the bank rate is fixed, Interest rates on money market will react,
When they adjust their rates this will influence the interest rates on mortgages,credit,cards etc.

Influencing AD. Which influences Inflation and Output

Question 7

How is the the Federal Reserve structured?

Answer 7

As a quasi-public institution owned by private commercial banks in districts that are members of the federal system.

Crash of 1800’s made US realise its needed. But didnt want it centralised.

Consists of:

• Board of Governors (Appointed with 16 members)
• Federal Reserve System
• Federal Open Market Committee

Question 8

How is the Bank of England structured?

Answer 8

2nd oldest central bank (oldest being Sweden). Established 1694.

Consists of:
- The Monetary policy committee (MPC)
(9 members: 5 bank staff, 4 external members) (Sets
target rate for policy)
- Open Market Operations:
Used to keep actual rate as close as possible to target rate. Operated by BoE.

Appointment of external members of MPC subject to parliamentary scrutiny

Question 9

What is the Bank Of England Act (1998)?

Answer 9

• Makes BoE responsible for formulating UK’s monetary policy via setting rate at which lends to banks
• Decisions made with primary aim of price stability, defined by Govt. inflation target.
• Secondary aim is to support the government’s economic policies,and help it meet its targets for growth and employment

Question 10

How was the ECB established?

Answer 10

Where other central banks introduce by law. Since ECB collection of economies created via Maastricht Treaty

Maastricht Treaty (1993)

Only recently considered central banks due to it being lender of last resort.

Question 11

What are the aims of the ECB?

Answer 11

As due to the Maastricht Treaty:

• Maintain price stability
• Convergence of economic performance
• High level of employment
• Support general economic policies`

Question 12

What are the organs of the European banking system?

Answer 12

• European monetary system
• ECB
• Central Banks of member states

Question 13

What is the structure of the ECB?

Answer 13

Run by 6-person Executive Board.
Monetary Policy determined by Governing Council

GC constitutes 6-person ECB Executive Board and Governors of
each member countryís Central Bank