Chapter 14 - Central Banks - Economics 244 - PDF

Economics 244 Chapter 14 Central banks: Origins of the central banking system: the history of central banking: The oldest central bank in the world is the Sveriges Riksbank, established in 1668. C...

Economics 244 Chapter 14 Central banks: Origins of the central banking system: the history of central banking: The oldest central bank in the world is the Sveriges Riksbank, established in 1668. Central banks were initially established to: 1. lend money to governments 2. facilitate international trade. The Bank of England, founded in 1694, was the archetype for central banks that were created in Europe during the eighteenth and nineteenth centuries. Central banking functions evolved over time to safeguard monetary stability - which required central banks to answer their parliaments. In the late 19th century, many countries adopted the gold standard - which required central banks to back their currencies with gold reserves. The gold standard was abandoned by many countries during the Great Depression - in order to give their central banks more flexibility to stimulate their economies. Today, most central banks have a dual mandate - to promote price stability and maximum employment. Notes on central bank independence: Central banks were originally private and independent. Many governments have since taken control of their central banks. There is a debate among economists about the optimal level of central bank independence. Some argue that central banks should be completely independent of government - in order to make objective decisions about monetary policy. Others argue that governments should have some influence over central banks - in order to ensure that monetary policy is aligned with other economic policies. Key takeaways: Central banks play a vital role in the global economy. Central bank independence is important for making objective decisions about monetary policy. Central banks should also be accountable to the public. Notes on the history of central banks in the United States: Americans were reluctant to establish a central bank because - they feared the concentration of power in the hands of a single institution. This hostility towards central banking dampened after the recurrent banking crises that hit the United States between 1870 and 1907. The Federal Reserve System was established in 1913 - to avoid the risk of power concentration. The Fed is a decentralized system of 12 regional Federal Reserve banks, each with its own board of directors. The Fed is privately owned by its member banks, but the Board of Governors in Washington, D.C. is a government entity. Notes on the history of central banks in emerging market economies: Most emerging market economies established their central banks after World War II, shortly after their independence from colonialism. The structure of these central banks is very similar to those of European central banks. Notes on the functions of central banks: Over the last two centuries, the functions of central banks have expanded to include the following: o Issuing banknotes o Policing banks o Monitoring international payments o Regulating the value of the national currency o Financing the government o Acting as a lender of last resort to banks Notes on the ownership of central banks: While today most central banks around the world are publicly owned, a few still have private ownership. The Bank of Italy is privately-owned by its commercial bank members. The Fed is partially privately-owned and partially publicly-owned. The European Central Bank is owned by the central banks of the member states of the Eurozone. Some central banks, such as those of: 1. Belgium 2. Greece 3. Switzerland 4. Japan 5. Turkey 6. South Africa, have shares that are privately owned. Key takeaways: The history of central banks is different in different countries. The functions of central banks have expanded over time. The ownership of central banks varies from country to country. Variations in the functions and structures of central banks: Summary of "Variations in the Functions and Structures of Central Banks": Central banks play an increasingly important role in the global economy. There is a great deal of variation in the structure and policy tools of central banks around the world. These differences are due to a variety of factors, including: 1. the level of sophistication of the banking and financial sectors 2. the domestic and global economic environment 3. the historical development of the central bank itself. Central banks have been gradually assigned more responsibilities - which has necessitated that they gain more independence from fiscal authorities and political institutions. Key takeaways: Central banks are not all the same. The structure and policy tools of central banks vary depending on the specific circumstances of each country. Central banks are playing an increasingly important role in the global economy. The European Central Bank, the Euro System and the European System of central banks: a. Expanded notes on the European Central Bank (ECB) b. the European System of Central Banks (ESCB): c. The European Central Bank (ECB) The ECB is the central bank of the Eurozone: a monetary union of 19 EU member states that have adopted the euro as their currency. The ECB is responsible for setting monetary policy for the Eurozone - with the primary objective of maintaining price stability. The ECB also oversees the financial system and promotes financial integration in the Eurozone. The ECB is governed by its Governing Council - which is composed of: a. the members of the Executive Board b. the governors of the National Central Banks (NCBs) of the Eurozone countries. The Governing Council meets twice a month to: - set monetary policy and make other decisions about the operation of the ECB. The ECB has a number of important functions, including: I. Setting monetary policy for the Eurozone II. Overseeing the financial system III. Promoting financial integration in the Eurozone IV. Managing the euro V. Conducting foreign exchange operations VI. Issuing euro banknotes The Euro system: is composed of : a. the ECB b. the NCBs of the Eurozone countries. The Euro system is responsible for carrying out the ECB's monetary policy decisions and for overseeing the financial system in the Eurozone. The Euro system has a number of important functions, including: I. Implementing the ECB's monetary policy decisions II. Overseeing the financial system in the Eurozone III. Providing liquidity to banks IV. Managing the euro V. Conducting foreign exchange operations The European System of Central Banks (ESCB): composed of: a. the ECB b. the NCBs of all 27 EU member states - regardless of whether they have adopted the euro. The ESCB is responsible for cooperation between central banks in the EU and for providing advice to the EU institutions on monetary and financial matters. The ESCB has a number of important functions, including: I. Cooperating on monetary policy II. Overseeing the financial system in the EU III. Providing advice to the EU institutions on monetary and financial matters The importance of the ECB, the Euro system, and the ESCB: 1. promoting economic stability and prosperity in the EU. 2. The ECB's monetary policy decisions have a significant impact on the performance of the Eurozone economy. 3. The Euro system and the ESCB: - oversee the financial system - promote financial integration in the EU. - promote price stability - promote financial stability - promote economic growth. Expansion of the notes on the European Central Bank (ECB), the Euro System, and the European System of Central Banks (ESCB): The ECB was established in 1998 as part of the creation of the Eurozone. The euro was launched in 1999 - it became the sole currency of the Eurozone in 2002. The ECB is headquartered in Frankfurt, Germany. The ECB's President, Christine Lagarde, is the chair of the Governing Council. The ECB is an independent institution. - This means that it is not subject to control by any government or political institution. - able to carry out its monetary policy mandate without being influenced by political considerations. Here are some examples of the ECB's activities: I. Setting interest rates: The ECB sets the key interest rates in the Eurozone. - These interest rates affect the cost of borrowing and lending money. - By setting interest rates, the ECB can influence economic activity and inflation. II. Conducting open market operations: The ECB conducts open market operations to buy and sell government bonds. - This helps to manage the supply of money in the Eurozone and to keep inflation under control. III. Supervising the banking system: it monitors the banks' financial health and ensures that they are complying with regulations. IV. Promoting financial stability: This includes identifying and mitigating risks to the financial system. Sure. Here is a more expanded version of your notes on the European Central Bank (ECB), the Euro System, and the European System of Central Banks (ESCB): The ECB and the UK's withdrawal from the EU: The UK's withdrawal from the EU (Brexit) has created a number of challenges for the ECB. - One challenge is that the UK is one of the largest economies in the Eurozone. - Second challenge is that the UK's financial system is closely integrated with the financial systems of other Eurozone countries. Additional: The NCBs of the EU member states retain their national currencies as members of the ESCB with a special status: - Are allowed to conduct their own respective national monetary policies. Capital stock of the ECB is owned by the central banks of the current 28 EU member states. The shares of the NCBs: - Weighted according to the respective member states in the total population and GDP of the EU a. Bulk capital stock = 19 euro are NCBs b. Non-Eurozone CBs – 3.5% capital ECB ECB adjusts shares every five years or when another country joins. - Deutsche Bundesbank = 18% - Banque de France = 14.18% - Banca d’Italia = 12.31% - Banco de Espana = 8.84% Decision-making bodies of the ECB: Governing Council The Governing Council is the highest decision-making body of the ECB. - It is responsible for formulating monetary policy in the euro area which includes: a. setting interest rates b. conducting open market operations. c. oversees the implementation of the single currency d. supervises the euro area banking system.  The Governing Council meets twice a month in Frankfurt, Germany. 1. At its first meeting each month, the Governing Council decides on the ECB's monetary policy stance - This decision is based on an assessment of economic and financial conditions in the euro area. 2. At its second meeting each month - the Governing Council discusses other issues related to the ECB's tasks and responsibilities. The Governing Council is composed of the following members: The ECB president and vice-president The four members of the ECB Executive Board The governors of the national central banks of the 19 euro-area countries Each member of the Governing Council has one vote. Decisions are made by a simple majority of votes cast. Conducts monetary policy with the primary objective of maintaining price stability. Executive Board 1. The Executive Board is responsible for carrying out the day-to-day operations of the ECB. 2. It also prepares the decisions of the Governing Council. The Executive Board is composed of the following members: - The ECB president and vice-president - Four other members 3. The Executive Board members are appointed by the European Council for a non-renewable term of eight years. 4. Decisions are based on majority voting. 5. Divides countries according – size and financial sector ranking General Council 1. The General Council provides advice to the Governing Council and the Executive Board. 2. It also plays a consultative role in certain ECB decision-making processes, such as: a. the appointment of the Executive Board members. b. The General Council is composed of the governors of all 27 national central banks of the EU member states. The General Council meets at least four times a year. It can also be convened by the ECB president or at the request of at least one-third of its members. Decision-making process The decision-making process of the ECB is based on a number of principles, including: a. Independence b. Transparency c. accountability. The ECB is independent of political interference, and its decisions are made in the best interests of the euro area economy. The ECB is also committed to transparency and accountability - it publishes a wide range of information about its activities and decisions.  The ECB's decision-making process is also based on a number of formal procedures. For example: a. the Governing Council's decisions are made by majority voting b. each member of the Governing Council has one vote. c. The Executive Board is responsible for preparing the decisions of the Governing Council d. it also has the power to make certain decisions on its own. How Monetary policy is conducted within the ECB: The ECB's monetary policy objectives The ECB's primary objective is to maintain price stability in the euro area. - Price stability is defined as a medium-term inflation rate of below but close to 2%. The ECB also aims to support the economic policies of the euro area member states - to ensure an independent and open market economy. The ECB's monetary policy instruments The ECB uses a variety of monetary policy instruments to achieve its objectives. These instruments can be divided into two categories: a. Conventional b. unconventional. Conventional monetary policy instruments Conventional monetary policy instruments are those that have been used by central banks for many years.  They include: Open market operations: - Open market operations involve the ECB buying and selling government bonds and other financial assets. - When the ECB buys assets: a. it injects money into the financial system. - When the ECB sells assets: a. it withdraws money from the financial system. - Open market operations are the ECB's most important monetary policy instrument. Standing facilities: - The ECB offers two standing facilities to banks: a. the marginal lending facility (MLF) b. the deposit facility. - The MLF allows banks to borrow money from the ECB overnight at a fixed interest rate. - The deposit facility allows banks to deposit money with the ECB overnight at a fixed interest rate. - The interest rates on the standing facilities are designed to set a floor and a ceiling for short-term interest rates in the euro area. - Emergency liquidity assistance (ELA) Minimum reserve requirements: - The ECB requires banks to hold a minimum amount of reserves with the ECB. - This requirement is: a. designed to reduce the amount of money that banks can lend out b. to control the money supply. Unconventional monetary policy instruments Unconventional monetary policy instruments are those that have been developed more recently in response to the global financial crisis and the European sovereign debt crisis. They include: Quantitative easing: - Quantitative easing involves the ECB buying large quantities of government bonds and other financial assets from banks and other financial institutions. - This injects money into the financial system - reduces the cost of borrowing. Negative interest rate policy: - Negative interest rate policy (NIRP) involves the ECB charging banks a negative interest rate to deposit their reserves with the ECB. a. This is designed to encourage banks to lend out money rather than keeping it with the ECB. How the ECB assigns monetary policy tasks to the national central banks The ECB assigns monetary policy tasks to the national central banks (NCBs) through a number of mechanisms. The Governing Council of the ECB: - The Governing Council is the ECB's highest decision-making body and is responsible for setting monetary policy for the euro area. - The Governing Council includes the governors of the NCBs of the euro-area countries.  The Euro system: - The Euro system is the monetary system of the euro area and comprises the ECB and the NCBs of the euro-area countries. - The Euro system is responsible for implementing monetary policy in the euro area. The Euro system’s Committee on Market Operations: - The Euro system’s Committee on Market Operations is responsible for carrying out the ECB's open market operations. - The committee is composed of representatives from the ECB and the NCBs of the euro-area countries. The Euro system’s Target2 system: - The Target2 system is a payment system that links the NCBs of the euro-area countries. - The Target2 system allows the NCBs to settle payments between each other quickly and efficiently. Additional: - Main objectives: a. maintain price stability b. ensure independent market economy c. ensure open market economy - Direct macroeconomic stimulation a. Implemented through fiscal policies - Price stability importance: a. Economic growth b. Job creation - Achieving price stability: a. Maintain medium-term inflation rate close to = below 2% - Governing Council: a. Controls money supply b. Set deposit facility rate – rate on tenders to banks c. Refinancing rate – rate on overnight deposits  d. Marginal Lending facility rate – rate on overnight credit - Asset purchase programmes (APP) - Securities Market Programme (SMP) The Federal Reserve System: The Federal Reserve System (Fed) is the central bank of the United States. It is privately owned by its member banks, but independent of the U.S. government. - Subject to oversight from congress that periodically reviews its activities. - Its decisions are independent of government. The Fed's primary responsibility is: 1. to conduct monetary policy 2. to promote maximum employment 3. stable prices 4. moderate long-term interest rates. The Fed: a. supervises and regulates the nation's financial institutions b. provides banking services to the U.S. government c. provides banking services to the U.S. financial system. The Fed's highest decision-making body is the Board of Governors - which is composed of seven members who are appointed by the President and confirmed by the Senate. The Fed has a number of regional banks that act as its operating arm and carry out most of its activities. The Fed generates income: - Services provided to member banks - Interest earned on government securities - Interest earned from foreign currency - Interest earned from loans to financial institutions  Excess income (after covering day-to-day operations): - Funnelled into U.S treasury 12 regional Federal reserve banks: - Operate as branches to the Fed - Implement feds dual mandate of long-term price stability - Implement feds macroeconomic stability = create jobs Key takeaways: The Fed is one of the most important and influential central banks in the world. The Fed's decisions have a significant impact on the U.S. economy. The Fed is independent of the U.S. government, but is subject to oversight by Congress. Components: Federal Reserve Board of Governors (FRB): - Mainly assumes regulatory and supervisory responsibilities over member banks. Federal Open Market Committee (FOMC): - FRB - President of FRB New York - 4 Regional FRB presidents - Convenes = 8 times a year - Decisions based on: (U.S economy forecasts) a. Green book b. Blue book c. Beige book - FRB staff analysis of monetary policy - Federal advisory council Comparing the ECB and the FED: Key takeaways: The ECB and the Fed are both independent central banks with a decentralized structure. The ECB's primary objective is to achieve price stability, while the Fed has a dual mandate of achieving price stability and supporting macroeconomic objectives including those for growth and employment. The ECB has less power than the Fed over the national central banks. Monetary operations are not centralized in the Euro system as they are in the Federal Reserve System. The ECB is not involved in supervision and regulation of financial institutions, while the Fed is. The ECB buys government bonds outright to finance fiscal budget deficits, while the Fed accepts government bonds as collateral for new loans to the banking system.  - The ECB is more focused on price stability - the Fed has a broader mandate that includes supporting economic growth and employment. - The ECB also has less power over the national central banks than the Fed does. - the ECB and the Fed have different approaches to financing fiscal budget deficits. The bank Of England: History and structure The BoE was founded in 1694, - making it the second-oldest central bank in the world. It was originally established as a private bank - but it was nationalized in 1946. The BoE is governed by a Court of Directors - which is responsible for setting the bank's overall strategy and appointing the governor and other senior executives. - The Court of Directors is made up of five executive members from the BoE and up to nine non-executive members. Monetary policy The BoE's primary responsibility is to conduct monetary policy to achieve price stability. The BoE's Monetary Policy Committee (MPC) is responsible for setting interest rates and other monetary policy tools.  The MPC meets eight times a year to discuss the economy and set interest rates. The MPC publishes the minutes of its meetings to explain its decisions and provide transparency. Other responsibilities The BoE also has a number of other responsibilities, including: I. Regulating the UK financial system II. Issuing banknotes and managing the UK's foreign reserves III. Promoting financial stability IV. Overseeing the payment system Brexit Brexit is likely to have a significant impact on the BoE and the UK economy. The BoE has warned that a hard Brexit could lead to a recession and a sharp decline in the value of the pound. The BoE is also concerned about the impact of Brexit on the UK's financial services sector. Additional notes: The BoE is accountable to the Parliament - but it is independent in its monetary policy decisions. - This means that the government cannot tell the BoE what interest rates to set. The BoE uses a variety of tools to conduct monetary policy including: a. interest rates b. quantitative easing c. open market operations.  The BoE is also responsible for regulating the UK financial system. - This means that it is responsible for ensuring that banks and other financial institutions are: a. Sound b. that they treat their customers fairly.. Interest rates Interest rates are the price of borrowing money. The BoE can raise or lower interest rates to make it more or less expensive to borrow money. When interest rates are high: - people are less likely to borrow money and spend it - which can help to reduce inflation. When interest rates are low: - people are more likely to borrow money and spend it - which can help to stimulate the economy. Quantitative easing Quantitative easing (QE) is a form of monetary policy in: - which the central bank creates new money electronically and uses it to buy financial assets such as: a. government bonds b. corporate bonds. - This injects money into the financial system and reduces the cost of borrowing. - QE is typically used when interest rates are already very low and the central bank needs to do more to stimulate the economy. Financial regulation The BoE is responsible for regulating the UK financial system. This includes: a. regulating banks b. building societies c. investment firms d. insurance companies. The BoE sets rules and standards for financial firms to follow in order to: protect consumers maintain financial stability. Brexit Brexit is the United Kingdom's withdrawal from the European Union. It is likely to have a significant impact on the BoE and the UK economy. Impact on the BoE Brexit could make it more difficult for the BoE to achieve its objectives. For example: - a hard Brexit could lead to a decline in the value of the pound a. which could make it more difficult to control inflation. - Brexit could also make it more difficult for the BoE to regulate the UK financial system. Impact on the UK economy Brexit is likely to have a negative impact on the UK economy. - This could lead to: a. a slowdown in economic growth b. higher unemployment c. lower wages.  The BoE will need to carefully monitor the economy and use its monetary policy tools to mitigate the negative effects of Brexit. Structure of central banks in larger economies: Bank of Canada: Late Establishment ▪ The Bank of Canada was established in 1935, - relatively late compared to some other central banks. ▪ The Great Depression of the 1930s highlighted the need for a central bank to supervise the Canadian financial sector and manage the country's monetary policy. ▪ Prior to the establishment of the BoC, monetary policy in Canada was largely determined by the private sector. Ownership and Governance ▪ The BoC is a public corporation owned by the Government of Canada. ▪ The BoC's Board of Directors is appointed by: a. the Minister of Finance ▪ the Governor of the BoC is appointed by: a. the Board of Directors. ▪ The BoC is independent in its monetary policy decisions, - but it is accountable to the Parliament of Canada. Responsibilities The BoC has a number of responsibilities, including: I. Conducting monetary policy to achieve price stability and support economic growth. II. Supervising and regulating the Canadian financial system. III. Promoting financial stability. IV. Issuing banknotes. V. Managing the Government of Canada's public debt. Monetary Policy ▪ The BoC's primary objective is to achieve price stability. ▪ The BoC uses a variety of tools to achieve its objective, including: 1. interest rates 2. quantitative easing. ▪ QE is typically used when interest rates are already very low and the central bank needs to do more to stimulate the economy. Dual-Key Monetary Policy Framework ▪ The BoC operates under a dual-key monetary policy framework - which means that it has two main objectives: ‘ a. price stability b. economic growth. - This framework is unique in that it explicitly incorporates a flexible exchange rate into its target. - In contrast, the central banks of many other developed economies focus solely on inflation targeting.  ▪ The BoC's dual-key monetary policy framework is designed to balance the need for price stability with the need to support economic growth. ▪ A flexible exchange rate allows the BoC to adjust its monetary policy in response to changing economic conditions. - For example, if the Canadian dollar is appreciating: a. the BoC may lower interest rates to make Canadian exports more competitive. Decision-Making ▪ The BoC's monetary policy decisions are made by the Governing Council: - which is composed of a. the Governor b. four Deputy Governors. - The Governing Council meets eight times a year to discuss the economy and set interest rates. ▪ The BoC's monetary policy decision-making process is highly transparent. i. The BoC publishes detailed economic projections and monetary policy reports on a regular basis. ii. The BoC also holds quarterly press conferences to explain its monetary policy decisions to the public. the Canadian government recognized the need for a central bank to oversee the financial system and promote monetary stability. Ownership: The BoC initially started as a privately owned financial institution - but it was turned into public ownership in 1938.  This was done to ensure that the BoC would be independent from private interests and would act in the best interests of the Canadian public. Regional Offices: ▪ The BoC has five regional offices located in: a. Vancouver b. Calgary c. Toronto d. Montreal e. Halifax. - These offices play an important role in: a) collecting data on the local economy b) providing feedback to the BoC's head office in Ottawa. Responsibilities: The BoC has a number of important responsibilities, including: i. Conducting monetary policy to achieve low and stable inflation ii. Supervising and regulating the Canadian financial system iii. Issuing Canadian banknotes iv. Managing Canada's foreign exchange reserves Governance: The BoC is governed by a Board of Directors, which is appointed by the federal government. The Board of Directors is responsible for appointing the BoC's Governor and Deputy Governors. Monetary Policy: The BoC's primary objective is to achieve low and stable inflation. - It does this by using a variety of tools, including interest rates, quantitative easing, and forward guidance. The BoC's monetary policy framework is unique in that it explicitly incorporates a flexible exchange rate into its target. - This means that the BoC does not attempt to peg the value of the Canadian dollar to a specific currency or exchange rate basket. a. the BoC allows the Canadian dollar to float freely on the foreign exchange market. Goal and Independence: The BoC's goal of low and stable inflation is set jointly by the BoC and the federal government. - This is different from the central banks of many other developed countries, which have a more independent goal-setting process. the BoC is still highly independent in its monetary policy decisions. The federal government cannot interfere with the BoC's decisions on a day-to-day basis. the government can only issue a directive to the BoC in very exceptional circumstances. Decision-Making: The monetary policy decision-making process is a complex one that involves a number of steps, including: Economic projections: The BoC staff produces economic projections for the next two years. Briefings: The BoC staff briefs the Governing Council on the economic projections and other relevant information. Deliberations: The Governing Council deliberates on the economic projections and other information, and makes a decision on interest rates.  Announcement of decisions: The BoC announces its monetary policy decisions to the public and explains the reasons behind its decisions in a press release. Transparency: The BoC is very transparent in its monetary policy decision-making process. - In addition to releasing press releases explaining its decisions a. the BoC also publishes detailed economic projections b. monetary policy reports on a regular basis. This transparency helps to ensure that the public understands the BoC's thinking This transparency helps to ensure that the BoC is accountable for its decisions. The Bank of Japan: Historical Background The BoJ's relationship with the Japanese government has evolved over time. Prior to the Bank of Japan Act of 1997 - the BoJ was not formally independent of the government. - The government had significant influence over the BoJ's operations and decisions, including: a. the appointment of the BoJ's governor b. Appointment of other senior officials. The Bank of Japan Act of 1997 was a significant step towards greater central bank independence. - The Act granted the BoJ greater instrument and goal independence - meaning that it was given more freedom to choose the tools and objectives of its monetary policy. Current Relationship Today, the BoJ is considered to be somewhat independent of the Japanese government. o The government no longer has voting members on the BoJ's Policy Board o it can send representatives from the Ministry of Finance and other agencies to board meetings. - These government representatives do not have voting rights - they can request delays in monetary policy decisions. The Ministry of Finance also maintains control over the BoJ's actions related to the yen exchange rate. o The BoJ acts on behalf of the Ministry of Finance - which can instruct it to conduct foreign exchange interventions using government funds and BoJ foreign assets. Implications of Government Influence The government's influence over the BoJ has a number of implications. 1. On the one hand, it can help to ensure that monetary policy is aligned with the government's economic and financial policy objectives. 2. On the other hand, it can also lead to political interference in monetary policy decisions. For example, the government may be tempted to pressure the BoJ to keep interest rates low during periods of economic weakness, even if this risks higher inflation. Or, the government may pressure the BoJ to intervene in the foreign exchange market to support the value of the yen, even if this risks harming Japanese exporters. Here are some specific examples of how the government's influence has affected the BoJ's monetary policy decisions in the past: In 1990, the Japanese government pressured the BoJ to lower interest rates in order to stimulate the economy. - The BoJ complied, but this led to a period of asset price inflation and financial instability. In 2008, the Japanese government pressured the BoJ to intervene in the foreign exchange market to support the value of the yen. - The BoJ complied, but this was costly and ineffective. In 2013, the Japanese government announced a new policy agenda known as "Abenomics," which included a commitment to reflate the economy. - The BoJ launched a massive quantitative easing program in response to this policy agenda. Greater instrument and goal independence: The Bank of Japan Act of 1997 granted the BoJ greater instrument and goal independence. - This means that the BoJ is now free to choose the tools it uses to achieve its monetary policy goals - it is not subject to government interference in setting its interest rate targets. This increased independence has allowed the BoJ to pursue more effective monetary policy - particularly during the post-2008 global financial crisis period. For example, the BoJ was able to implement a bold quantitative easing program: a. to combat deflation b. stimulate economic growth. Political influence: For example, in 2000, the government representatives on the Policy Board requested a delay in the BoJ's decision to end its zero-interest rate policy. - The BoJ initially agreed to the delay, but it ultimately decided to raise interest rates despite the government's objections. This incident shows that the government can still exert some influence over the BoJ's monetary policy decisions, even though it does not have formal voting rights on the Policy Board. Foreign exchange intervention: The Ministry of Finance's control over the BoJ's foreign exchange intervention operations is another example of the government's ongoing influence over the central bank. The government can instruct the BoJ to conduct foreign exchange interventions to manage the value of the yen. - This is because the government believes that a stable yen is important for Japan's economic growth and prosperity. Comparison with European counterparts: The BoJ is less independent than some of its European counterparts, such as: 1. the Bank of England 2. the European Central Bank. - These central banks have a higher degree of independence from their governments a. which means that they are free to make monetary policy decisions without political interference. This difference in independence reflects the different political and economic contexts in Japan and Europe. - The Japanese government has historically played a more active role in managing the economy - European governments have generally taken a more hands-off approach. The Peoples Bank of China: The Chinese government's influence over the PBoC The Chinese government maintains a significant influence over the PBoC's operations and policies in a number of ways. Appointment of key personnel: The governor and deputy governors of the PBoC are appointed by the State Council, which is the highest executive body of the Chinese government. The PBoC's Monetary Policy Committee (MPC) also includes representatives from various government institutions. Direct intervention in monetary policy decisions: The Chinese government can directly intervene in the PBoC's monetary policy decisions. For example, in 2015, the government issued a directive to the PBoC to maintain a stable exchange rate for the renminbi. Indirect influence through the financial system: The Chinese government owns and controls most of the country's large banks. This gives the government significant indirect influence over the PBoC's monetary policy, as the PBoC can use its regulatory and supervisory powers to pressure banks to comply with the government's economic goals. Implications for monetary policy The PBoC's lack of independence from the Chinese government has a number of implications for monetary policy. Monetary policy may be more focused on achieving the government's economic goals than on maintaining price stability. For example, the government may pressure the PBoC to keep interest rates low to support economic growth, even if this risks causing inflation. Monetary policy may be less predictable. Because the government can intervene in the PBoC's decision-making process, it is more difficult for businesses and consumers to anticipate changes in monetary policy. This can make it more difficult for businesses to make investment decisions and for consumers to plan their spending. Monetary policy may be less effective. Because the PBoC is not fully independent, it may be more difficult for it to implement unpopular but necessary monetary policy measures. For example, the PBoC may be reluctant to raise interest rates to combat inflation if the government is concerned about the impact on economic growth. Overall, the PBoC's lack of independence from the Chinese government has a number of implications for monetary policy. It can make monetary policy more focused on the government's economic goals, less predictable, and less effective. One-party political system: The PBoC's lack of independence from the Chinese government is not surprising, given China's one-party political system. The Chinese Communist Party (CCP) has a monopoly on political power in China, and it exercises a significant degree of control over all aspects of the economy, including the financial system. Government's role in managing the economy: The Chinese government has traditionally played a very active role in managing the economy. This is known as the "command economy" model. The government sets economic targets, allocates resources, and intervenes in markets to achieve its desired outcomes. The PBoC is seen as an important tool for achieving the government's economic goals. The government can use the PBoC's monetary policy tools, such as interest rates and reserve requirements, to influence economic growth, inflation, and employment. Increased flexibility in setting interest rates and reserve requirements: The PBoC has gained some independence over time. For example, the government has given the PBoC more flexibility in setting interest rates and reserve requirements. This suggests that the Chinese government is recognizing the importance of monetary policy autonomy in promoting economic growth and stability. However, the government still maintains a significant degree of control over the PBoC's monetary policy decisions. For example, the government can veto any interest rate or reserve requirement changes that it does not approve of. Future evolution of PBoC's relationship with the government: The PBoC's relationship with the Chinese government is likely to continue to evolve in the future. As China's economy becomes more sophisticated and integrated with the global economy, the need for a more independent central bank may become more apparent. For example, if China wants to become a major international financial center, it will need to have a central bank that is seen as credible and independent. This is because investors are more likely to invest in a country with a central bank that is free to make its own decisions without government interference. However, it is important to note that the Chinese government is unlikely to give up complete control over the PBoC anytime soon. The CCP is very sensitive to anything that it sees as a threat to its political power, and it views the financial system as a key lever of control. Overall, the PBoC's lack of independence is a reflection of the Chinese government's desire to maintain tight control over the economy. However, the government is gradually recognizing the importance of monetary policy autonomy, and the PBoC's relationship with the government is likely to continue to evolve in the future. The PBoC's lack of independence from the Chinese government is not surprising, given China's one-party political system. The Communist Party of China (CPC) has ruled China since 1949 and maintains a tight grip on power. The CPC sees the PBoC as an important tool for achieving its economic goals, and it is not willing to cede control over the central bank. However, the PBoC has gained some independence over time. In the past few decades, the Chinese government has gradually liberalized the economy and given the PBoC more flexibility in conducting monetary policy. For example, the PBoC now has more freedom to set interest rates and reserve requirements. This increased independence has allowed the PBoC to pursue more effective monetary policy, particularly during the post-2008 global financial crisis period. For example, the PBoC was able to implement a series of measures to stimulate economic growth and prevent a financial crisis. The PBoC's relationship with the Chinese government is likely to continue to evolve in the future. As China's economy becomes more sophisticated and integrated with the global economy, the need for a more independent central bank may become more apparent. A more independent central bank would be able to focus on achieving price stability and financial stability without being constrained by the government's short-term political goals. However, it is also important to note that the CPC is unlikely to cede complete control over the PBoC. The CPC is still deeply suspicious of market forces and believes that the government needs to play a leading role in guiding the economy. The PBoC's lack of independence has a number of implications for the Chinese economy. First, it makes the Chinese economy more vulnerable to government interference. For example, the government could pressure the PBoC to keep interest rates low to boost economic growth, even if this leads to inflation. Second, it makes it more difficult for the PBoC to conduct effective monetary policy. For example, if the government is running a large fiscal deficit, the PBoC may be reluctant to raise interest rates to combat inflation, for fear of crowding out government borrowing. Third, it undermines the PBoC's credibility and trustworthiness with financial markets. This could make it more difficult for the PBoC to manage the economy and prevent financial crises. Overall, the PBoC's lack of independence is a significant weakness of the Chinese economy. It is important for the Chinese government to recognize the importance of a more independent central bank and to gradually cede control over the PBoC in the future. This would help to make the Chinese economy more resilient and sustainable in the long term. Structure and independence of central banks in emerging economies: The structure and independence of central banks in emerging market economies (EMEs) are complex and vary depending on the specific country and its political and economic context. However, there are some general trends that can be observed. Structure Central banks in EMEs are typically structured in a similar way to central banks in developed countries, with a board of directors or governors responsible for setting monetary policy. However, there are some important differences. For example, central banks in EMEs often have closer ties to the government than central banks in developed countries. This is because the government often plays a more active role in managing the economy in EMEs. Independence Central bank independence is the degree to which a central bank is free from government interference in its monetary policy decisions. Central bank independence is important for a number of reasons. First, it helps to ensure that central banks can focus on achieving their long-term goals of price stability and financial stability. Second, it helps to reduce the risk of political interference in monetary policy, which can lead to bad economic outcomes. Central bank independence in EMEs is generally lower than in developed countries. This is because governments in EMEs are often more reluctant to cede control over monetary policy. However, there has been a trend towards greater central bank independence in EMEs in recent years. Challenges Central banks in EMEs face a number of challenges, including: Rapid economic growth: Central banks in EMEs need to be able to manage rapid economic growth without causing inflation or financial instability. Developing financial markets: Central banks in EMEs need to help develop their financial markets so that they can play a more effective role in the economy.  Volatility in global financial markets: Central banks in EMEs need to be able to manage the risks posed by volatility in global financial markets. Political interference: Central banks in EMEs need to be able to resist political interference in their monetary policy decisions. Despite these challenges, central banks in EMEs play a vital role in supporting economic growth and stability. By building and reforming the financial infrastructure, developing financial markets, and managing foreign exchange reserves, central banks in EMEs are helping to create a more favorable environment for businesses and investors. Examples Here are some examples of the structure and independence of central banks in EMEs: Brazil: The Central Bank of Brazil is a government-owned entity, but it has a high degree of independence in setting monetary policy. China: The People's Bank of China is a government-owned entity with a low degree of independence. India: The Reserve Bank of India is a government-owned entity with a medium degree of independence. Mexico: The Bank of Mexico is a government-owned entity with a high degree of independence. South Korea: The Bank of Korea is a government-owned entity with a high degree of independence. Conclusion The structure and independence of central banks in EMEs vary depending on the specific country and its political and economic context. However, there is a general trend towards greater central bank independence in EMEs. This is important for supporting economic growth and stability in EMEs. Yes, you are correct. Central banks in EMEs typically have less independence than central banks in developed countries. This is because the government often plays a more active role in managing the economy in EMEs. You have also mentioned some of the key developmental roles that central banks in EMEs assume, such as: Enhancing credit flow to productive fast-growing export-oriented industries and employment intensive sectors Subsidizing banks when they make affordable housing and education loans Increasing access to affordable financial services in the agricultural sector Promoting financial education and literacy Supporting small local, rural, and cooperative banks These developmental roles are important for supporting economic growth and stability in EMEs. However, they also require central banks to work closely with the government. This can sometimes lead to conflicts of interest, and it can also make it more difficult for central banks to maintain their independence. Despite the challenges, central banks in EMEs have played a vital role in the region's economic growth and development in recent decades. They have helped to reform and supervise the banking sector, promote financial inclusion, and provide support to key sectors of the economy. Here are some examples of how central banks in EMEs have used their developmental roles to support economic growth and development: The Reserve Bank of India (RBI) has implemented a number of programs to promote financial inclusion, such as the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, which has provided bank accounts to over 400 million people. The South African Reserve Bank (SARB) has established a number of special funds to support small and medium-sized enterprises (SMEs), such as the National Empowerment Fund (NEF) and the Small Enterprise Finance Agency (SEFA). Banco do Brasil has a number of programs to support the agricultural sector, such as the Programa Nacional de Fortalecimento da Agricultura Familiar (PRONAF) program, which provides loans to smallholder farmers.  Bank Negara Malaysia (BNM) has implemented a number of programs to promote financial literacy, such as the Financial Literacy Program for Tertiary Students and the Financial Literacy Program for Rural Communities. These are just a few examples of how central banks in EMEs are using their developmental roles to support economic growth and development. Central banks in EMEs play a vital role in the region's economy, and they are likely to continue to play an important role in the years to come. Should Central Banks be Independent: More independent = more effective monetary policy Dimensions: - Goal independence: a. Institutional insulating characteristics of central banks from political interference. - Instrument independence: a. Refers to the ability to freely implement policy instruments. Degree of independence: a. Preferences b. Circumstances The Case of Independence: Macroeconomic stability can best be achieved If: a. Monetary policy is properly coordinated with fiscal policy. b. Due to governments responsibility of macroeconomic performance. Central banks are not immune to political pressure a. Theory of bureaucratic behaviour: - Bureaucracy’s objective is to maximize its own welfare. - Opposes consumer behaviour in maximizing personal welfare.  b. Central banks can pursue a course of narrow self-interest: - Increase its power at expense of public interest - Increase its prestige at expense of public interest The Trend toward Greater Independence: High correlation: macroeconomic stability and independent central banks a. Led to a trend to increase independence worldwide Drawbacks: to ensure no deviation from overall socioeconomic goals - Central banks have been made accountable to their parliaments a. Required to become more transparent about operations b. Required to publish minutes of decisive meetings c. Communicating policies to public After global crisis: - Fiscal and monetary agents have increased their coordination: a. Policies b. Decisions Bank of England: - Most independent in the world - Formed the Financial Policy Committee - Has invited a nonvoting member from: a. U.K Treasury United States: - U.S. Financial Stability Oversight Council comprises: a. All principal regulators as members b. The secretary of the treasury as chairman.