1. Lecture 24: Indecency of central bank
Mishkin Ch 12 – part B
page

2. Outline What motivate Fed’s behavior?
Is Fed free from presidential and congressional pressures?
How independent is the Fed?

3. How Independent is the Fed?
Stanly Fischer: Instrument independent and Goal independent. Fed has both types of independency.
Independent revenue, non-renewable 14 year-term
Congressional influence:
Fed is structured by legislation that is written by Congress
Federal Reserve Act require the Fed to report to Congress
Presidential influence:
Via influence on Congress
Appoints members of Board of Governors and chairman

4. European central bank Patterned after the Federal Reserve
Central banks from each country play similar role as Fed banks
Executive Board
President, vice-president and four other members
Eight year, nonrenewable terms
Governing Council

5. Differences
National Central Banks control their own budgets and the budget of the ECB
Monetary operations are not centralized
Does not supervise and regulate financial institutions

6. ECB independence Most independent in the world Long terms
Determines own budget
Less goal independent
Price stability
Charter cannot by changed by legislation; only by revision of the Maastricht Treaty

7. Explain central bank behavior
Theory of bureaucratic behavior: objective is to maximize its own welfare which is related to power and prestige
Fed fight vigorously to preserve autonomy
Fed avoid conflict with more powerful groups
Does not rule out altruism

8. Reasons to support independence
Political pressure would impart an inflationary bias to monetary policy
Political business cycle
Could be used to facilitate Treasury financing of large budget deficits  inflation
Too important to leave to politicians, the principal-agent problem is worse for politicians

9. Reasons against independence
Undemocratic, Fed is an elite group
Unaccountable
Difficult to coordinate fiscal and monetary policy
Has not used its independence successfully