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Lecture 24: Indecency of central bank

Lecture 24: Indecency of central bank . Mishkin Ch 12 – part B page 321-332 . Outline. What motivate Fed’s behavior? Is Fed free from presidential and congressional pressures? How independent is the Fed?. How Independent is the Fed?.

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Lecture 24: Indecency of central bank

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  1. Lecture 24: Indecency of central bank Mishkin Ch 12 – part B page 321-332

  2. Outline • What motivate Fed’s behavior? • Is Fed free from presidential and congressional pressures? • How independent is the Fed?

  3. How Independent is the Fed? • Stanly Fischer: Instrument independent and Goal independent. Fed has both types of independency. • Independent revenue, non-renewable 14 year-term • Congressional influence: • Fed is structured by legislation that is written by Congress • Federal Reserve Act require the Fed to report to Congress • Presidential influence: • Via influence on Congress • Appoints members of Board of Governors and chairman

  4. European central bank • Patterned after the Federal Reserve • Central banks from each country play similar role as Fed banks • Executive Board • President, vice-president and four other members • Eight year, nonrenewable terms • Governing Council

  5. Differences • National Central Banks control their own budgets and the budget of the ECB • Monetary operations are not centralized • Does not supervise and regulate financial institutions

  6. ECB independence • Most independent in the world • Long terms • Determines own budget • Less goal independent • Price stability • Charter cannot by changed by legislation; only by revision of the Maastricht Treaty

  7. Explain central bank behavior • Theory of bureaucratic behavior: objective is to maximize its own welfare which is related to power and prestige • Fed fight vigorously to preserve autonomy • Fed avoid conflict with more powerful groups • Does not rule out altruism

  8. Reasons to support independence • Political pressure would impart an inflationary bias to monetary policy • Political business cycle • Could be used to facilitate Treasury financing of large budget deficits  inflation • Too important to leave to politicians, the principal-agent problem is worse for politicians

  9. Reasons against independence • Undemocratic, Fed is an elite group • Unaccountable • Difficult to coordinate fiscal and monetary policy • Has not used its independence successfully

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