The European Central Banking

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The European Central Banking. Frederick University 2014. The Eurosystem. The European System of Central Banks The Eurosystem The European Central Bank (ECB) The National Central Banks (NCBs). Why a system instead of a single CB?. Builds on existing competencies of the NCBs
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The European Central BankingFrederick University2014The EurosystemThe European System of Central Banks The EurosystemThe European Central Bank (ECB)The National Central Banks (NCBs)Why a system instead of a single CB?
  • Builds on existing competencies of the NCBs
  • Geographically large euro area
  • National diversity
  • Major Tasks of the Eurosystem
  • Monetary policy
  • Foreign exchange operations
  • Operation of the payment systems
  • Hold and manage foreign reserves
  • Other tasks of the Eurosystem
  • Advisory functions
  • Collection and compilation of statistics
  • Contribution to prudential supervision and financial stability
  • Insurance of euro banknotes
  • International cooperation
  • Objectives and tasks of the ECB
  • Price stability
  • Defining Eurosystem policies
  • Deciding, coordinating and monitoring the monetary policy operations
  • Adopting legal acts
  • Authorizing the issuance of banknotes
  • Intervention in the foreign exchange markets
  • International and european cooperation
  • Other responsibilities of the ECB
  • Statutory reports
  • Monitoring financial risks
  • Fulfilling advisory functions of community institutions and national authorities
  • Running the IT systems
  • Strategic and tactical management of the ECB’s foreign reserves
  • Tasks of the NCBs
  • Execution of monetary policy operations
  • Operational management of the ECB’s foreign reserves
  • Management of their own foreign reserves
  • Operation and supervision of payment systems
  • Joint issuance of banknotes together with the ECB
  • Collection of statistics and providing assistance to the ECB
  • Functions outside the ESCB
  • Monetary policyPhilosophy of the European central banking
  • Short run vs. long run in macroeconomics
  • Long run neutrality of money
  • Inflation – a monetary phenomenon
  • Money supply and monetary base Definition: The monetary base (MB) is the total amount of a currency that is either circulating in the hands of the public, or on the commercial bank deposits held in the central bank’s reserves:
  • Banknotes and coins in the hands of the public
  • Reserves of the commercial banks in the central banks
  • MB = C + R
  • Money supply(MS):
  • Banknotes and coins in the hands of the public
  • Deposits at the commercial banks
  • MS = C + D
  • The Money TreeDeposit Multiplier – Maximum increase in money supply as a result of the increase in the reserves of the banking systemThe Deposit Multiplier€1000 new reservesenter Commercial Bank “А”Reserves(safety)1000 + 800 + 640 + 512 + … 200Loans (income)800dm = ΔD/ ΔR160640128512The Money Multiplier
  • mm = MS/MB
  • MS = C + D = C x D/D + D = D (C/D + 1)
  • MB = C + R = C + rrD + er =
  • = C x D/D + rrD + er x D/D =
  • = D (C/D + rr + er/D)
  • mm = (C/D + 1)/(r + er/D + C/D)
  • Money multiplier vs. deposit multiplier
  • Deposit multiplier
  • Dm = 1/rr
  • Shows the maximum increase in the MS as a result of an increase in reserves
  • Money multiplier
  • Mm = (C/D + 1)/(rr + er /D + C/D)
  • Shows the actual increase in MS as a result of an increase in reserves
  • Instruments of the monetary policy
  • open market operations,
  • standing facilities,
  • minimum reserve requirements for credit institutions.
  • Standing facilities
  • The Eurosystem offers credit institutions two standing facilities:
  • Marginal lending facility in order to obtain overnight liquidity from the central bank, against the presentation of sufficient eligible assets;
  • Deposit facility in order to make overnight deposits with the central bank.
  • The interest rates on the marginal lending and deposit facilities normally provide a ceiling and a floor for the overnight market interest rate.
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