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The Federal Reserve. Vincent Reitano October 25 th 2010. Outline & Methodology . Introduction to Federal Reserve. Real World Impact of Fed. General definitions: Central Bank & MP History and organization of Fed Federal Funds Rate Policy Implementation New policies (QE, TALF).

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The federal reserve

The Federal Reserve

Vincent Reitano

October 25th 2010


Outline methodology
Outline & Methodology

Introduction to Federal Reserve

Real World Impact of Fed

  • General definitions: Central Bank & MP

  • History and organization of Fed

  • Federal Funds Rate

  • Policy Implementation

  • New policies (QE, TALF)

  • Modeling the US economy through indicators and economic identities

    • Quantitative view of GDP

    • AD/AS Model, graphs

  • Impact of Fed, Fiscal Policy

  • Financial Markets


Definition role of fed
Definition & Role of Fed

  • The US Federal Reserve

    • “The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.”

  • Key Concepts: Central Bank & Monetary System

  • Domestic, international



U s economic history
U.S. Economic History

19th-20th Century: Economic issues

1907 Panic

Creation of Federal Reserve


19 th 20 th century bank panics
19th-20th Century Bank Panics

Variables

-Instability in financial markets

-Lack of bank reserves

-Speculation

-Lack of Regulation


National monetary commission
National Monetary Commission

  • Panic of 1907

  • Variables, Influences

    • JP Morgan

  • Congress, Nelson Aldrich


The federal reserve act of 1913
The Federal Reserve Act of 1913

  • Signed by President Wilson December 23, 1913 with changes/amendments

    • Finally fulfilled Alexander Hamilton’s dream

  • Created Central Bank & Regional Banks

  • Specific language used in act:

    • Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.


Modern fed policy controversy
Modern Fed Policy: Controversy

“Fed Speak”

  • Paul Volcker: 1979-1987; 2008-Current

    • Stagflation

    • Associated Federal Funds Rate increases

  • Alan Greenspan: 1987-2006

    • Lost PhD paper on housing bubbles

    • Reactions to historical events


Organization of the fed
Organization of the Fed

  • Board of Governors

    • 7 Members, Chairman and Vice-chairman

    • Recent Chairmen….

  • Federal Open Market Committee (FOMC)

    • Board of Governors + 5/12 Regional Fed Presidents

  • Regional Banks


Role of the fed
Role of the Fed

1. Banking system regulation

  • Fractional-Reserve Banking

    • Reserve Ratio, Money creation, Multiplier Example

  • “Lender of last resort”

    2. Money Supply

  • M1, M2, M3, MZM

  • Liquidity of money and other assets

  • Fisher Effect: Nominal  Real

    • (1+r)*(1+h)=(1+R)



Federal funds rate
Federal Funds Rate

Interbank loan rate

Basis Points

Greenspan Predictions!


Policy tools
Policy Tools

  • Open Market Operations

    • Sale of bonds: taking money out of the economy

    • Purchase of bonds: put money into the economy

      • Logically, this implies….

  • Discount Rate

    • Inverse relationship between rate and lending

  • Reserve Requirements

    • Cash or Fed Reserves


Modern policy tools
Modern Policy Tools

  • What the textbooks will not tell you…

  • 1. Quantitative Easing (QE)

  • 2. Term Asset Backed Securities Loan Facilities

    • Effectiveness of these policies


Building a model
Building a Model

  • GDP=Y=C+I+G+NX

    • Income Expenditure Identity (a)

    • What does each variable represent?

  • Total Production=Total Income=Total Expenditure

    • Fundamental Identity of National Income Accounting (b)

    • Y=Y=Y?


Almost there
Almost there…

  • Spvt+Sgovt=Y+NFP-C-G

    • Derived from substitution of both formulas;

    • Input Identity (a)

    • Economic fact that NX+NFP=CA


Finally finished
Finally finished…

Spvt=I+(-Sgovt)+CA


Ad as model
AD/AS Model

Y=AF(K,N); derivative of AD=MPK; shifts


What about fiscal policy
What about Fiscal Policy…?

  • Expansion vs. Contraction

    • Taxes and spending/stimulus

  • Business Cycles

  • How Monetary Policy & Fiscal Policy interact


Side note econ politics media
Side Note: Econ, Politics & Media

Classical vs. Keynesian economics

Economic Theory/Conjecture vs. Fact

Democrat vs. Republican

Media: The sky is falling everyday


The fed is awesome where do i look for current information
The Fed is awesome! Where do I look for current information?

  • FRB Website

  • FRB email updates

  • St. Louis Bank FRED

  • Beige Book

  • BLS, BEA

  • Great external sites: Seeking Alpha, blogs of economists

    • Connecting math and economics


Works cited
Works Cited

Abel, Andrew B., Ben Bernanke, and Dean Darrell Croushore. Macroeconomics. Boston: Addison-Wesley, 2011. Print.

"Banking Panics in the US: 1873-1933 | Economic History Services." EH.Net | Economic History Services. Economic History Association. Web. 22 Oct. 2010. <http://eh.net/encyclopedia/article/wicker.banking.panics.us>.

"The Federal Reserve System: Purposes & Functions." Board of Governors of the Federal Reserve System. Web. 15 Oct. 2010.

"Federal Reserve System." Wikipedia, the Free Encyclopedia. Web. 15 Oct. 2010. <http://en.wikipedia.org/wiki/Federal_Reserve#Tools>.

"The Founding of the Fed." Federal Reserve Bank of New York. Web. 20 Oct. 2010. <http://www.ny.frb.org/aboutthefed/history_article.html>.

"FRB: Term Asset-Backed Securities Loan Facility." Board of Governors of the Federal Reserve System. Web. 20 Oct. 2010. <http://www.federalreserve.gov/monetarypolicy/talf.htm>.

"FRB: Term Deposit Facility." Board of Governors of the Federal Reserve System. Web. 20 Oct. 2010. <http://www.federalreserve.gov/monetarypolicy/tdf.htm>.

Greenspan, Alan. "The Delphic Future." The Age of Turbulence: Adventures in a New World. New ed. New York: Penguin, 2007. Print.

Mankiw, N. Gregory. Principles of Macroeconomics. 4th ed. Mason, OH: Thomson South-Western, 2007. Print.

"Panic of 1907." Wikipedia, the Free Encyclopedia. Web. 15 Oct. 2010. <http://en.wikipedia.org/wiki/1907_Panic>.

Statute, By. "FRB: Reserve Requirements." Board of Governors of the Federal Reserve System. Web. 15 Oct. 2010. <http://www.federalreserve.gov/monetarypolicy/reservereq.htm>.

Thomas, Mark. "Central Bank Independence and Inflation." Economist's View. 20 Nov. 2005. Web. 21 Oct. 2010. <http://economistsview.typepad.com/economistsview/2005/11/central_bank_in.html>.