FNCE 4070 Financial Markets and Institutions

1
FNCE 4070Financial Markets andInstitutions

• Lecture 7
• Central Banking and the Conduct of Monetary
  Policy

2
What are These Central Banks and Who are These
Central Bankers?
3
Why Study Central Banking?

• Answer Central bank actions have significant
  impacts on financial markets and specifically on
• (1) interest rates (the cost of borrowing and the
  return on investing).
• (2) financial asset prices (stocks, bonds,
  foreign exchange)
• Thus we need to know something about central
  banks
• How do central banks operate in financial
  markets?
• How can we monitor the potential for changes in
  central bank actions?
• Understanding these issues will add to our
  understanding of (1) and (2) above.

4
Who Runs a Countrys Central Bank?

• Central Banks may be either
• (1) government owned and government controlled
  or
• (2) run under regulations that are specifically
  created to prevent extensive government
  interference.
• In most countries -- especially in the developing
  world -- the central bank is owned and controlled
  by the national government and, thus, has the
  potential for a minimal degree of autonomy from
  that government.
• This situation, unfortunately, allows for the
  possibility of government interference in
  monetary policy.
• As one example, the Central Bank of China, the
  People's Bank of China (PBOC) enjoys little
  operational independence.
• Unlike Western central banks, the PBOC does not
  have the final word on adjusting interest rates
  or the value of the yuan. The basic course of
  monetary and currency policy is set by the State
  Council, China's cabinet, or by the Communist
  Party's ruling Politburo.

5
Central Banks in Major Countries

• In the major countries of the world, however,
  central banks generally operate independent of
  their respective governments. Some of these
  banks are owned by their governments while others
  are not.
• The Bank of England was nationalized in 1946
  however in 1997 it became an independent public
  organization, still wholly owned by the
  Government, but with independence in setting
  monetary policy to achieve government mandated
  inflation target.
• The Federal Reserve, on the other hand, is
  owned by the 12 district banks and it is
  considered an independent central bank because
• Its decisions do not have to be ratified by the
  President or anyone else in the executive or
  legislative branch of government,
• It does not receive funding appropriated by
  Congress, and
• The terms of the members of the Board of
  Governors span multiple presidential and
  congressional terms.

6
Reducing Government Control of Central Banks

• Removing government control is designed to
  prevent political interference in the monetary
  policy process.
• In reality, however, the degree of true
  independence, or separation from government
  involvement, varies even among these countries.
• Some governments (e.g., the U.K., Australia, and
  Canada) are actively involved in setting specific
  inflation targets for their central banks.
• Others such as the ECBs operate within an
  inflation target as implied in its original
  charter.
• The Federal Reserve is probably an example of a
  central bank with the greatest separation from
  government involvement.

7
Major Central Banks Independence

• Central Bank (Date Founded) Date of Independence
• Federal Reserve (1913) 1913
• Bank of England (1694) 1997
• Bank of Japan (1882) 1998
• European Central Bank (1999) 1999
• Recognized date of separation from government
  influence.
• Granted in the 1913 Federal Reserve Act.
• Following the election of the new Labor
  Government in May 1997.
• Under revisions to the Bank of Japan Law
• As noted in the Maastricht Treaty (1993) and
  specified in the Banks charter.

8
Should Central Banks be Independent?

• Over the years, there has been growing debate as
  to the most efficient and effective arrangement
  for central banks.
• Case for Central Bank Independence
• Independent Central Banks are more likely to have
  longer run objectives while politicians may have
  shorter term objectives.
• Independence minimizes a political (i.e.,
  election induced) business cycle.
• A 2005 study suggested that political business
  cycles have been concentrated in the Latin
  America region.
• Empirical work suggests that countries with the
  most independent central banks do the best job of
  controlling inflation and achieving economic
  growth (see slides which review this evidence).
• Case against Central Bank Independence
• Central Bank should be accountable (at least in
  terms of their goals) to their general
  populations (and perhaps less so in terms of
  their policies to achieve goals).
• Hinders coordination of monetary and fiscal
  policy.

9
How Independent are Central Banks Today?

• Some central banks which we characterized as
  independent have their inflation goals set by
  their national governments, but are given freedom
  with regard to the use of policy instruments to
  achieve those goals.
• Bank of England The Banks monetary policy
  objective is to deliver price stability. Price
  stability is defined by the Governments
  inflation target of 2. The 1998 Bank of England
  Act made the Bank independent to set interest
  rates. (Bank web-site).
• Other examples Brazil, China, Mexico

10
Variations on Inflation Target Process

• Switzerland the central bank has authority to
  set its inflation target (currently at no more
  than 2 a year for the medium to long term).
• ECB governing council sets its own inflation
  target (currently 2) consistent with the 1992
  Maastricht Treatys stated goal of price
  stability.
• Canada and New Zealands inflation targets are
  determined jointly by their respective
  governments and their central banks.
• Both the U.S. and Japan, where neither the Fed
  nor the BOJ has specific mandated government
  (inflation) goals.

11
Central Bank Independence and Inflation, 1955-1988
12
Central Bank Independence and Inflation, 1973-1988
13
Central Bank Independence and Economic Growth,
1973-1988
14
Visualizing the Path of Central Bank Monetary
Policy

• Monetary Policy Tools (Policy Instruments)
• (1) Open market operations (buying and selling
  debt)
• (2) Discount window (borrowing) facilities
• (3) Reserve requirement adjustments
• (4) Intervention in foreign exchange markets
• Operational Targets (Targets of Policy Actions)
• Monetary aggregates (money supply measures)
• Financial market variables (short interest rates,
  exchange rates)
• Macroeconomic Target (Ultimate Goals of Policy)
• Inflation
• Economic growth
• Employment
• External trade

15
Question What is the Most Commonly Used of
Policy for the Fed?

• Monetary Policy Tools (Policy Instruments)?
• (1) Open market operations
• (2) Discount window (borrowing) facilities
• (3) Reserve requirement adjustments
• (4) Intervention in foreign exchange markets
• Operational Targets (Targets of Policy Actions)
• Monetary aggregates (money supply measures)
• Financial market variables (short interest rates,
  exchange rates)
• Macroeconomic Target (Ultimate Goals of Policy)
• Inflation
• Economic growth
• Employment
• External trade

16
Historical Use of Fed Policy Instruments

• 1913 Act Major policy instrument was the
  discount facility and the discount rate
  (rediscounting of commercial paper).
• Federal Reserve Act of 1913 actually had no
  provision for changes in reserve requirements and
  open market operations as a policy tool were not
  yet discovered.
• When discount loans (which were a source of
  income for the Fed) fell in 1920, the fed started
  to purchase seasoned securities for income and as
  they did so they quickly realized that these
  open market operations were having a impact on
  bank reserves.
• Thus, as a result, open market operations evolved
  into the major Fed instrument from this point on.

17
Open Market Operations

• (1) Open market operations Purchases and sales
  of U.S. Treasury and federal agency as specified
  by the Federal Open Market Committee (FOMC).
• A short term objective is specified in terms of a
  desired interest rate (federal funds rate) and is
  conveyed to the Federal Reserve Bank of New York
  for implementation.
• Since 1995 the Fed has specified an explicit
  target level for the federal funds rate.
• For specific targets since 1995, see
  http//www.federalreserve.gov/fomc/fundsrate.htm
• The FOMC has regular meeting scheduled
  approximately every 6 weeks (8 times a year),
  although it can call an emergency meeting
  anytime.
• For scheduled meeting and minutes of meetings
  see
• http//www.federalreserve.gov/monetarypolicy/fomc
  calendars.htm

18
Discount Facility

• (2) The discount rate The interest rate charged
  to commercial banks and other depository
  institutions on loans they receive from their
  regional Federal Reserve Bank.
• Federal Reserve Banks offer three discount window
  programs to depository institutions
• (1) primary credit, i.e., overnight, (current
  rate 0.75)
• (2) secondary credit (to meet severe short term
  financial difficulties (current rate 1.25), and
• (3) seasonal credit, i.e., to smaller
  institutions in agricultural or seasonal resort
  areas (current rate 0.20)
• All discount window loans must be fully secured
  (usually with Treasury securities).
• The term discount rate is normally applied to
  the rate on primary credit loans.
• For current and historical discount rates see
  http//www.frbdiscountwindow.org/index.cfm

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Relationship of Discount Rate to Fed Funds Rate

• Historically, the discount rate was set below the
  federal funds rate.
• To discourage banks from borrowing at the
  discount window and lending it out at a profit in
  the fed funds market, the Fed required a bank to
  prove it that a discount loan was its last option
  for securing needed funds.
• In 2003, however, the Fed introduced a new policy
  by which the discount rate is now set above the
  fed funds rate.
• Since 2003, the discount rate has averaged 85
  basis points above the effective fed funds rate.
• See exhibits on next slide.

20
Fed Funds Rate and Discount Rate

• 2003 - Present

• 1995 - 2002

21
Reserve Requirements

• (3) Reserve requirements The amount of funds
  (reserves) that a depository institution must
  hold in reserve against its specified deposit
  liabilities.
• Reserves can be held the form of vault cash or
  deposits with Federal Reserve Banks.
• Reserves requirements are set against transaction
  accounts (e.g., demand deposits, NOW accounts,
  etc), time deposits, and eurocurrency deposits.
• Under the Monetary Control Act of 1980, the Fed
  can vary reserve requirement up to 14 on
  transaction accounts and up to 9 on all other
  deposits.
• This act also applies these reserve requirements
  to all commercial banks, regardless of Fed
  membership. (See next slide)
• For historical and current reserve requirements
  see
• http//www.federalreserve.gov/monetarypolicy/rese
  rvereq.htm

22
Monetary Control Act (MCA) of 1980

• Before the passage of the MCA in 1980, only
  commercial banks that were members of the Federal
  Reserve System had to meet the Fed's reserve
  requirements.
• State-chartered commercial banks that were not
  Federal Reserve members had to meet their
  respective state's reserve requirements, which
  typically were lower.
• As a result, many commercial banks were dropping
  their Federal Reserve membership in favor of
  state charters.
• And, as banks did so, Federal Reserve member bank
  transaction deposits fell from nearly 85 of
  total U.S. transaction deposits in the late 1950s
  to 65 by the late 1970s.
• The MCA resolved this problem by authorizing the
  Fed to set reserve requirements for all
  depository institutions, regardless of Fed
  membership status.

23
Limited Use of Reserve Requirements as a Monetary
Policy Tool

• Since 1980, there have been only a handful of
  policy-related reserve requirement changes in the
  United States. As two examples
• In December 1990, the Fed cut the requirement on
  time deposits and on Eurocurrency deposits from
  3 to 0.
• The Fed suggested that the cut would reduce
  banks' costs, "providing added incentive to lend
  to creditworthy borrowers.
• In April 1992, the Fed cut the requirement on
  transaction deposits from 12 to 10.
• The Fed suggested that this cut would put banks
  "in a better position to extend credit."

24
Question What Operational Target Does the Fed
Use?

• Monetary Policy Tools (Policy Instruments)
• Open market operations
• Operational Targets (Targets of Policy Actions)?
• Monetary aggregates (money supply measures)
• Financial market variables (short interest rates,
  exchange rates)
• Macroeconomic Target (Ultimate Goals of Policy)
• Inflation
• Economic growth
• Employment
• External trade

25
Historical Use of Operational Targets by the
Federal Reserve

• Interest Rate Targets
• In the years immediately after WW II, the Federal
  Reserve agreed to peg interest rates at very
  low levels (3/8 on Treasury bills and 2 ½ on
  Treasury bonds).
• Fed agreed to this interest rate target as a way
  of holding down the Treasurys war financing
  costs (see next slide)
• In 1951, an agreement was reached between the
  Treasury and the Fed agreed that the Fed would no
  longer peg Treasury interest rates (agreement
  called the The Accord) .
• In the 1950 and 1960s, the Federal Reserve
  decided to target money market conditions, and
  specifically short term interest rates.

26
Short Term Interest Rates After WWII
27
Historical Use of Operational Targets by the
Federal Reserve

• Recall that in the 1970s, the U.S (as well as
  other industrial countries) experienced very high
  inflation rates.
• During this time, under increasing criticism from
  monetarists that central banks were unable
  control inflationary pressures, the shift was
  from interest rate targets to targeting of
  monetary aggregates, specifically various money
  supply measures (M1, M2, etc).
• Milton Friedman (1968) Inflation is always and
  everywhere a monetary phenomenon.
• By the end of the 1970s, most major central banks
  had dropped interest rate targets and adopted
  some form of monetary aggregate targeting
• Bank of England in 1973
• Bundesbank (Germany) in 1975
• Bank of Japan in 1978
• Federal Reserve October 6, 1979.

28
Short History of Money Supply Targeting

• The 1978 Humphrey-Hawkins Act mandated that the
  Fed set annual targets for money supply and that
  the Fed Chairman report to Congress twice each
  year regarding these targets.
• However, a monetary target was a appropriate only
  so long as its velocity (the rate of turnover of
  a dollar of the money supply) was stable over the
  long term.
• Unfortunately, the long term stability of money
  velocity, which was at the core of monetarism,
  disappeared beginning in the late 1980s.
• In addition, there was concern that in targeting
  the money supply, central banks were losing
  control over interest rates and these rates were
  becoming more volatile.

29
Velocity of Money
30
Volatility of Interest Rates in the 1980s
31
Return to Interest Rate Targets

• By the 1980s, central bank concern about the
  changing velocity of money combined with the wide
  swings in interest rates which had been
  occurring, resulted in the de-emphasis this
  monetary aggregate approach.
• Thus by the 1990s, central banks had shifted
  their operational target focus back to short term
  interest rates.
• In July 1993, the Fed announced it was no longer
  using any monetary targets.
• In the 1990s, most major central banks had
  abandoned monetary targets in favor of some short
  term interest rate as their operational target.
  Todays rates are
• Fed Reserve The fed funds rate (rate for
  reserves in the interbank market).
• Bank of England Official bank rate
• European Central Bank Main refinancing rate
• Bank of Japan Uncollateralized overnight call
  rate

32
Question What is Feds Most Commonly Used
Macroeconomic Target?

• Monetary Policy Tool
• Open market operations (Buying and selling
  Treasury securities)
• Operational Target
• Financial market variable (short term interest
  rates)
• Macroeconomic Target?
• Inflation target
• Economic growth target
• Unemployment rate target
• Exchange rates target

33
Early U.S. Central Bank History

• Except for two failed attempts (1791 and 1816),
  the U.S. operated without an effective central
  bank up until 1913.
• Prior to 1913, there were frequent economic
  recessions and financial crises in the U.S. with
  the Bank Panic of 1907 finally convincing the
  government that a central bank was necessary.
• On December 23, 1913, Congress passed and
  President Woodrow Wilson signed into law The
  Federal Reserve Act, establishing a central bank
  for the United States.
• The Act was also called the Glass-Owen Act.
• The 1913 Act was to provide for 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.
• Note There were no explicit macro economic goals
  in the 1913 Act and no mention of open market
  operations.

34
U.S. Economic Performance During the Early Fed
Years
35
Changing Goals of the Federal Reserve

• In response to the unemployment crisis of the
  Great Depression, the U.S. Congress, in February
  1946, passed the Full Employment Act
• The Congress hereby declares that it is the
  continuing policy and responsibility of the
  Federal Government to promote maximum
  employment, production and purchasing power.
• These new goals also become the goals of the
  central bank.

36
The 1970s -80s A New Problem

• Recall, in the 1970s, global inflation became
  the major economic issue for industrial
  countries.
• Two distinct inflation peaks 1973/74 and
  1980/81.
• As a result, many central banks turned their
  attention to inflation and some to the use of
  inflation targets as a macro economic goal.
• Begins with New Zealand adopting an inflation
  target of 0 to 2 in March 1980.

• Inflation in Industrial Countries, per year

37
Adoption of Explicit Inflation Targets

• Early Adopters (with original target)
• New Zealand March 1990 (set at 0 to 2)
• Canada February 1991 (set at 1 to 3)
• United Kingdom October 1992 (set at 2)
• Australia January 1993 (set a 2 to 3)
• Sweden January 1993 (set at 2)
• Finland February 1993 (set at 2)
• Spain January 1995 (set at 3.5 to 4)
• Later Adopters (with original target)
• Euro-zone Jan 1999 (set below, but close to, 2)
• Poland January 1999 (8 to 8.5)
• Brazil June 1999 (set at 8)
• South Africa 2002 (set a 3 to 6)

38
Initial Response of the U.S. to High Inflation

• In 1977, additional mandates for the Federal
  Reserve were introduced with Congressional
  amendments to the Federal Reserve Act
• The 1977 amendments required the Board of
  Governors and the FOMC to "maintain the growth of
  monetary and credit aggregates commensurate with
  the economy's long-run potential to increase
  production, so as to promote effectively the
  goals of maximum employment, stable prices, and
  moderate long-term interest rates.
• However, no explicit inflation targets were
  introduced at that time.

• U.S. Inflation

39
History of Macroeconomic Targets

• From a practical standpoint there are any number
  of macroeconomic variable a central bank might
  target, including
• A unemployment rate (has been proposed for South
  Africa)
• A real GDP growth rate
• An exchange rate (Bretton Woods, 1944 1971
  U.K. October 1990 September 1992 Hong Kong
  and Singapore today)
• An inflation target
• The use of exchange rate targets was popular
  among some central banks in the late 1980s/early
  1990s.
• Bank of England adopted an exchange rate target
  in 1990.
• As noted earlier, in March 1990, the Central Bank
  of New Zealand was the first to adopt an
  inflation target.
• Over the decade of the 1990s, a growing number of
  countries adopted inflation targets
• From 4 countries in 1990 to 54 by 1998.
• And in 2009 the U.S. followed with an announced
  implied inflation target of 2

40
Case Study Inflation Targeting in New Zealand

• Note GST refers to Goods and Services Tax
• New Zealand had informally targeted inflation
  at 0 to 2 beginning in 1988 although in 1990 it
  was formally introduced into law with the New
  Zealand Act of 1989.

41
Inflation Targeting Impact on Interest Rates New
Zealand
42
Final Issue Central Bank Transparency

• Transparency means that a central bank provides
  the general public and financial markets with
  relevant information in an open, clear and timely
  manner.
• Transparency is potentially important because it
  reduces uncertainty about a central banks
  intention.
• Helps the financial market establish anchors
  critical to their expectations.
• Today, most central banks consider transparency
  as crucial to their success.
• Monetary policy is assumed to be more effective
  when the central bank provides the public with
  guidance on its objectives, activities and
  outlook.

43
Central Bank Transparency

• Many Central Bank web sites are now in English
• Visit http//www.bis.org/cbanks.htm
• Many central bankers regularly talk to the
  public.
• Central Bank decisions and actions are published
  in a timely manner.
• Federal Reserve Bank Has eight scheduled
  meetings per year. A press statement is released
  immediately following each meeting.
• http//www.federalreserve.gov/fomc/calendars
• Bank of England Monetary Policy Committee meets
  the first Thursday of every month. The decisions
  on interest rates are announced at 12 noon
  immediately following the meeting.
• http//www.bankofengland.co.uk/monetarypolicy/deci
  sions/decisions07.htm
• Governing Council of the ECB meets on the first
  Thursday of each month with the decision on the
  key ECB interest rates is issued at 145 p.m.
  C.E.T. At 230 p.m. C.E.T. , the President and
  the Vice-President of the ECB hold a press
  conference to discuss the decision.
• http//www.ecb.int/press/govcdec/mopo/2007/html/in
  dex.en.html
• Bank of Japan announce their interest rate
  decisions immediately following their meeting.
• http//www.boj.or.jp/en/mopo/mpmdeci/index.htm/

44
ECB and Bank of England Press Releases

• ECB http//www.ecb.int/press/html/index.en.html
• ECB Follow-up (With Q and A) http//www.ecb.int/pr
  ess/pressconf/2008/html/index.en.html
• Bank of England http//www.bankofengland.co.uk/pu
  blications/news/2008/index.htm

45
Measures of Central Bank Transparency
Fed ECB UK Japan Canada NZ AU
Goal of Monetary Policy and Accountability              
Explicit Inflation Target Specified No Yes Yes No Yes Yes Yes
Inflation Target/Range  2 lt2 2  ---- 1-3 1-3 2-3
Reports to Legislature (Accountability) Yes Yes Yes Yes Yes Yes Yes
               
Information To Financial Markets              
Reports on Monetary Policy S M Q M Q Q Q
Forecasts Released S S Q S Q Q Q
               
Operational Procedures              
Policy Meetings Per Year 8 12 12 14 8 8 11
Decisions Announced Immediately After Policy Meetings Yes Yes Yes Yes Yes Yes Yes
Press Releases Immediately After Policy Meetings Yes Yes Yes Yes Yes Yes Yes
Press Conferences (After Meetings) Yes Yes Yes Yes No Yes No
Voting Results Published Yes No Yes Yes No No Yes
Full Minutes of Policy Meetings Published Yes No Yes Yes No No Yes
Weeks After Minutes Published 3   2 5     2
Note Implied Target for U.S. Fed will hold 4 a year, beginning in April 2011. M Monthly Q Quarterly S Semi-annual.        
46
Links to Worlds Major Central Banks

• United States
• http//www.federalreserve.gov/
• European Union
• http//www.ecb.int/
• Bank of England
• http//www.bankofengland.co.uk/
• Bank of Japan
• http//www.boj.or.jp/en/index.htm

47
Other Useful Web Sites

• Links to all the worlds Central Banks (note 172
  banks as of March 27, 2011)
• http//www.bis.org/cbanks.htm
• Federal Reserve statistical data
• http//www.federalreserve.gov/releases/
• Economic time series, U.S. and some foreign (also
  allowing for graphing of data)
• http//www.economagic.com/

48
Appendix 1 The Channel of Fed Policy

• The following is from the Federal Reserve web
  site and articulates in the Feds words the
  channel of monetary policy in the U.S. today

49
U.S. Monetary Policy Channel

• According to the Federal Reserve
• Using the three policy instruments, the Federal
  Reserve influences the demand for, and supply of,
  balances that depository institutions hold at
  Federal Reserve Banks and in this way alters the
  federal funds rate.
• 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, and,
  ultimately, a range of economic variables,
  including employment, output, and prices of goods
  and services.
• http//www.federalreserve.gov/monetarypolicy/fomc.
  htm

50
Appendix 2 The Organizational Structure of the
Federal Reserve
51
Formal Structure of the Federal Reserve System

• The system (i.e., formal structure) as it exists
  now includes
• Twelve Federal Reserve Banks
• Member Banks, i.e., members of the Federal
  Reserve (around 3,600, out of about 7,500 banks)
• Seven individuals who are members of the Board of
  Governors (BOG) of the Federal Reserve System
  (including a Chairman).
• Twelve individual members of the Federal Open
  Market Committee (FOMC).
• Federal Advisory Council (12 bankers)
• Note The system, however, is dominated by the
  Board of Governors

52
Formal Structure of the Fed
53
The Twelve Federal Reserve Districts
54
The Federal Open Market Committee

• Undoubtedly the most closely watch group within
  the Federal Reserve is the Federal Open Market
  Committee.
• There are 12 members on the FOMC
• All seven members of the Board of Governors plus
  the president of the Federal Reserve Bank of New
  York and four other presidents among the
  remaining 11 Federal Reserve District Banks (see
  Appendix 1 for the Fed structure).
• The chairman of the Board of Governors is the
  chair of the FOMC.
• The FOMC has scheduled meetings 8 times a year
  (about every 6 weeks) although emergency
  meetings can be called anytime, and at these
  meetings
• The FOMC makes decisions regarding the level of
  the federal funds rate.

55
Appendix 3 History of Other Major Central Banks

• The Bank of England, the Bank of Japan and the
  European Central Bank are discussed in the slides
  that follow

56
Bank of England

• Founded in 1694 initially to manage the U.K.
  Governments accounts and to borrow on behalf of
  the Government (usually to finance wars with
  France).
• Controlled by the Government until granted
  interest rate autonomy in 1997 by the Labor
  Party.
• Since May 1997 the Banks 9 member Monetary
  Policy Committee has had statutory responsibility
  for setting interest rates to meet the
  Government's stated inflation target.
• Each year the Chancellor of the Exchequer sets an
  inflation target for the country (currently 2).
  
• The MPC has to judge what interest rate is
  necessary to meet that inflation target.
• The Bank implements its interest rate decisions
  by setting the interest rate at which the Bank
  lends to commercial banks and other financial
  institutions in the U.K.

57
European Central Bank (ECB)

• Founded in January 1999 by a treaty between the
  European Central Bank (ECB) and the European
  System of Central Banks (ESCB).
• Stated goal is to maintain price stability in the
  euro area (at inflation rates of below, but close
  to, 2 over the medium term).
• The 18 member Governing Council is the main
  decision making body of the ECB.
• Consist of 6 Executive Board Members (chosen by
  the 12 euro member governments) plus the 12
  governors of all the national central banks from
  the 12 euro area countries
• The Governing Council meets its inflation target
  by setting the interest rate at which banks
  borrow from the central bank (similar to U.S.
  federal funds rate).
• The key ECB rate is the interest rate on
  refinancing operations which provide the bulk
  of liquidity to the banking system.

58
Bank of Japan (Nippon Ginko)

• Founded in 1882.
• The Bank of Japan Law (1998) gave the Bank of
  Japan autonomy for monetary policy.
• Also stated that monetary control shall pursuit
  price stability.
• The 7 member Policy Board targets an overnight
  interest rate for uncollateralized call money
  (similar to U.S. federal funds).
• The Bank controls the call money rate on a daily
  basis through money market operations (similar to
  open market operations).
• Also uses an official discount rate at which it
  will make loans to banks.
• At the present time, the Bank of Japan does not
  have a specified inflation target.