Topic 1 Central Banking Law
Topic 1: Central Banking Law 1
Core purposes of the CB a Core purposes 1 -Monetary Stability Core purposes 2- Financial Stability http://w.bankofengland.co.uklabout/pag es/corepurposes/default. aspX http://w.federalreserve.govi http://www.ecb.int/home/html/index.en.hti
Core purposes of the CB Core purposes 1 -Monetary Stability. Core purposes 2- Financial Stability http://www.bankofengland.co.uk/about/Pag es/corepurposes/default.aspx http://www.federalreserve.gov/ http://www.ecb.int/home/html/index.en.html 2
Monetary Policy a Monetary policy consists basically of three elements objectives of monetary policy, instruments of monetary policy and organization for formulating and implementing monetary policy
Monetary Policy Monetary policy consists basically of three elements: objectives of monetary policy, instruments of monetary policy and organization for formulating and implementing monetary policy. 3
TA Objectives of Monetary Policy Under the Bank of England Act, the monetary policy objectives of the Bank of England are to maintain price stability, and subject to that, to support the economic policy of the Government, including its objectives for growth and employment Under the federal reserve act the board of governors and the federal open Market Committee should seek to promote effectively the goals of maximum employment, stable prices, and moderate ong-term interest rates
A. Objectives of Monetary Policy Under the Bank of England Act, the monetary policy objectives of the Bank of England are to maintain price stability, and subject to that, to support the economic policy of the Government, including its objectives for growth and employment. Under the Federal Reserve Act, the Board of Governors and the Federal Open Market Committee should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” 4
To be continued °“the2003 PBOC Law states that the objectives of monetary policy are to maintain monetary stability, and in this way promote economic growth Why is monetary stability a primary objective while economic growth is a secondary one? to avoid the time inconsistency problem 5
To be continued the 2003 PBOC Law states that the objectives of monetary policy are to maintain monetary stability, and in this way promote economic growth. Why is monetary stability a primary objective while economic growth is a secondary one? --to avoid the time inconsistency problem 5
TB. Instruments of Monetary Policy Monetary policy Instrument is defined to mean the tool to achieve the monetary policy objectives a Traditionally the instruments of monetary policy include reserve requirements, discount facilities and open market operations
B. Instruments of Monetary Policy Monetary policy Instrument is defined to mean the tool to achieve the monetary policy objectives. Traditionally, the instruments of monetary policy include reserve requirements, discount facilities and open market operations. 6
To be continued * Under the 2003 PBOC Law, the following monetary policy instruments are at the PBOC'S disposal in implementing monetary policy: reserve requirements, base interest rates, rediscount facilities, provision of loans open market operations, and other monetary policy instruments determined by the state Council 7
To be continued Under the 2003 PBOC Law, the following monetary policy instruments are at the PBOC’s disposal in implementing monetary policy: reserve requirements, base interest rates, rediscount facilities, provision of loans, open market operations, and other monetary policy instruments determined by the State Council. 7
To be continued Reserve requirements are the fraction of deposits that banks and other depository institutions are required by law or requlation tc hold in reserve and not lent out Through varying the reserve requirement ratios, central bank can adjust the money supply amount in the market. The higher the reserve requirement ratio and the more the type of reservable deposits, the less the money and the derivative deposits used by banks
To be continued Reserve requirements are the fraction of deposits that banks and other depository institutions are required by law or regulation to hold in reserve and not lent out. Through varying the reserve requirement ratios, central bank can adjust the money supply amount in the market. The higher the reserve requirement ratio and the more the type of reservable deposits, the less the money and the derivative deposits used by banks. 8
To be continued However, reserve requirements are not costless. Holding a percentage of their deposits in reserve as non-interest-bearing balances at central bank is burdensome to banks
To be continued However, reserve requirements are not costless. Holding a percentage of their deposits in reserve as non-interest-bearing balances at central bank is burdensome to banks. 9
To be continued e The base interest rate is set by the central bank, upon which all other lending or savings interest rates are based. The increase(or decrease)in the base interest rates would increase(or decrease)the financing cost of a financial institution whether from the central bank or from the market
To be continued The base interest rate is set by the central bank, upon which all other lending or savings interest rates are based. The increase (or decrease) in the base interest rates would increase (or decrease) the financing cost of a financial institution, whether from the central bank or from the market. 10