On Central Banks

1
On Central Banks
2
Objective

• Understand the role and functioning of central
  banks

3
Outline

• The ABC of central bank balance sheet
• The concept of monetary base
• On seignorage
• The role of central banks

4
History

• Risens Standers Bank - later Swedish Sveriges
  Riksbank (1668).
• The Bank of England (1694) to help finance
  Englands wars with France.
• Bank of the United States (1790) to enlarge the
  mass of industrious and commercial enterprise.
• Banque de France (1800) to manage public debt.

5
Central Bank balance sheet 101 The Bundesbank
Assets Domestic securities 64 Direct loans to
banks 2 Other loans 4 Gold and SDRs 4 Foreign
currency 26 Total 100
Liabilities Currency 70 Bank reserve deposits
13 Other 13 Equity 4 Total 100
6
Central Bank balance sheet 101The US Federal
Reserve

• Assets
• US Treasury securities 88
• Gold and SDRs 4
• Foreign currency 4
• Cash being collected 1
• Other 3
• Total 100

• Liabilities
• Currency 91
• Bank reserve deposits 4
• US Treasury deposits 1
• Other 1
• Equity 4
• Total 100

7
Central Bank balance sheet 101The Bank of Japan
Assets Government securities 74 Loans
9 Foreign currency 5 Other 12 Total 100
Liabilities Currency 62 Bank reserve deposits
5 Government deposits 2 Other 17 Equity
3 Total 100
8
Central Bank balance sheet 101Generalization
Assets Domestic credit Foreign
currency Monetary Base
Liabilities Domestic currency Bank
reserves Monetary Base
9
Currency as liability

• Initially, currency notes could be exchanged for
  gold.
• Today, central banks are liable for the value of
  goods and services that can be purchased with the
  currency notes.

10
Central bank ownership

• State owned
• Argentina, Australia, Canada, Denmark, France,
  Finland, Germany, Ireland, India, Holland, New
  Zealand, Norway, Spain, Sweden, UK
• Privately owned
• South Africa, Switzerland, US
• Mixed ownership
• Austria (50), Belgium (50), Chile (50), Greece
  (10), Japan (55), Mexico (51), Turkey (25)

11
Seignorage

• Face value of money - Cost of producing money

12
Seignorage Origins

• The metal content of coins was being reduced to
  cover production costs, to assert authority, or
  simply to fill the seigneur's treasuries.

13
The Role of Central Banks

• Central Banks as Government Banks
• Central Banks as Bankers Banks
• Central Banks as Monetary Policymakers

14
Central Banks as Government Banks

• Government depositories
• Central banks receive and make payments on behalf
  of the government.
• Fiscal agents
• Central banks issue, service, and redeem
  governments debts.

15
Central Banks as Bankers Banks

• Lenders of last resort
• To minimize the probability of bank runs.

16
Central Banks as Monetary Policymakers

• Interest rates on Central Bank advances to other
  banks
• Discount rate (subsidy rate) and rationed credit
  The FED
• Subsidy and Lombard rates (penalty rate) The
  Bundesbank and The Swiss Natl Bank
• Multiple discount rates The Bank of Japan
• Overnight rate (penalty rate) Bank of Canada and
  Bank of England
• Open-market operations purchase or sale of
  government or private securities
• Outright transactions US, Canada,
• Repurchase agreements US, Germany
• Reserve requirements
• Force banks to adjust the amount of credit
  granted to other agents

17
Sterilized interventions

• Open-market interventions are often mirrored in
  foreign exchange interventions and vice-versa.
• Why?
• To keep the money supply stable

18
The Assignment problem

• Who should play a central role in achieving the
  national economic policy goals The Central Bank
  or the Ministry of Finance?
• Should the Central Bank look after the growth of
  the GDP?
• Should the Ministry of Finance balance national
  accounts?
• Vice-versa?
• The answer varies across nations as a function of
  policy goals.

19
Summary

• Central bank assets Domestic credit Foreign
  currencies
• Central bank liabilities Domestic currency
  Bank reserves
• Monetary base DC FC CURR BRES
• Seignorage face value - cost
• Central bank role
• Governments bank
• Banks bank
• Monetary policymaker