The Institution

1
The Institution

• The Federal Reserve System

• The Peoples Bank of China

2
Major Responsibilities

• conducting the nation's monetary policy
• supervising and regulating banking institutions
• maintaining the stability of the financial system
  and containing systemic risk
• providing financial services to the U.S.
  government/public/financial institutions, and to
  foreign official institutions

3
Major Responsibilities

• Under the guidance of the State Council, the PBC
  formulates and implements monetary policy,
  prevents and resolves financial risks, and
  safeguards financial stability.

4
Structure Top Management

• a central, governmental agency--the Board of
  Governors--in Washington, D.C.
• Chairman Ben S. Bernanke
• twelve regional Federal Reserve Banks, located in
  major cities throughout the nation.

5
Structure Top Management

• governor and a certain number of deputy
  governors.
• Governor Zhou Xiaochuan
• Head Office consists of 18 functional departments
  (bureaus). One of them is Monetary Policy
  Department.

6
Money Policy Institution

• Monetary policy is made by the Federal Open
  Market Committee, which consists of the Board of
  Governors of the Federal Reserve System and the
  Reserve Bank presidents.

7
Money Policy Institution

• The Monetary Policy Committee is composed of the
  PBC's Governor and two Deputy Governors, a Deputy
  Secretary-General of the State Council, a Vice
  Minister of the State Development and Reform
  Commission, a Vice Finance Minister, the
  Administrator of the State Administration of
  Foreign Exchange, the Chairman of China Banking
  Regulatory Commission, the Chairman of China
  Securities Regulatory Commission, the Chairman of
  China Insurance Regulatory Commission, the
  Commissioner of National Bureau of Statistics,
  the President of the China Association of Banks
  and an expert from the academia.

8
Money Policy Objects

• "to promote effectively the goals of maximum
  employment, stable prices, and moderate long-term
  interest rates," as required by the Federal
  Reserve Act.
• The objective of monetary policy is to maintain
  the stability of the Renminbi and thereby promote
  economic growth.

9
Stop and Compare(1)

• Independence
• The intent of Congress in shaping the Federal
  Reserve Act was to keep politics out of monetary
  policy. The System is independent of other
  branches and agencies of government. It is
  self-financed and therefore is not subject to the
  congressional budgetary process.

10
Monetary Policy Instruments

• Open market operations.
• Discount window lending.
• Reserve requirements.

11
Monetary Policy Instruments

• open market operations
• reserve requirement ratio
• central bank base interest rate, central bank
  lending and rediscounting
• other policy instruments specified by the State
  Council

12
Stop and Compare(2)

• Additional instrument
• other policy instruments specified by the
  State Council
• This reflects different two mechanisms
• Direct
• Indirect

13
Different Mechanisms

• Indirect
• 1.setting a target federal funds rate and
  using the tools of monetary policy--open market
  operations, discount window lending, and reserve
  requirements--to achieve that target rate

14
Different Mechanisms

• Indirect
• 2.Changes in the federal funds rate trigger a
  chain of events that affect other short-term
  interest rates, foreign exchange rates, long-term
  interest rates, the amount of money and credit in
  the economy, and, Macroeconomics variables
  employment(Low), output(consistent growth), and
  the prices of goods and services(stable).

15
federal funds rate

• The federal funds rate is the rate charged by one
  depository institution on an overnight sale of
  immediately available funds (balances at the
  Federal Reserve) to another depository
  institution
• the rate may vary from depository institution to
  depository institution and from day to day.

16
How to set target FFR

• FOMC meets on a regular basis
• They announce the target FFR after each meeting
• Updated numbers
• Date Increase Decrease Level
  03/26/06 25 --
  4.75
• 01/31/06 25 --
  4.50

17
Different Mechanisms

• Direct
• other policy instruments specified by the State
  Council allows PBC to set interest rates
  directly.

18
Links

• URL of the PBC
• http//www.pbc.gov.cn/english/

19
Questions

• 1. Whats the name of Chinas central bank?
• A. The Peoples Bank of China
• B. Bank of China
• 2. Which countrys central bank system do you
  think has more degree of freedom?
• A. America
• B. China