Download theory of central bank

CENTRAL BANK
Lecturer:
Prof. Insukindro, Ph.D
THEORY OF CENTRAL BANK
CONCEPT OF CENTRAL BANK
- Hegemonic system
- Non profit institution
Case 1: Transmission Role
A
C
B
D
m
n
II
I
X
CB
THEORY OF CENTRAL BANK
Case 2: Intermediation Role
A
(+
)
C
(+
)
B
(-)
D
(-)
FI 1
FI 2
II
I
CFI
THEORY OF CENTRAL BANK
FUNCTIONS OF CENTRAL BANK
Micro approach:
- Club theory, Banker’s bank or lender of last resort
- To maintain stability in the banking system.
A
C
B
D
CoB1
CoB2
II
I
CB
THEORY OF CENTRAL BANK
MACRO APPROACH ~ Monetary Authority
- Domestics
Internal balance: g, π, μ
- to preserve the value of the currency
- to formulate & implement monetary policy
The relationship between Central Bank and government
and other financial institutions.
- International
External balance: BOP = 0
Exchange rate
International Financial Institutions
Central Bank’s role in the flow of funds
Financial System
Returns
Funds
Households
Firms
Government
Financial
Market
Government /
Central Bank
Involvement
Returns
Funds
Households
Savers
Firms
Government
Borrowers
Funds
Returns
Financial
Intermediaries
Funds
Returns
Infrastructure and
Environtment
Source: PPSK BI, 2006, Insukindro (2007) and Hubbard (2008: 39), modified,
6
7
Key Services Provided by the Financial System
Financial System
Risk Sharing
Returns
Funds
Households
Firms
Government
Savers / Suppliers
Funds
Financial
Market
Government /
Central Bank/
Financial
Authority
Involvement
Financial
Intermediaries
Liquidity
Returns
Funds
Households
Firms
Government
Borrowers / Demanders
Funds
Returns
Returns
Infrastructure and
Environment
Information
Source: PPSK BI (2006); Insukindro (2007) and Hubbard (2008:39, 41), modified
INTER-RELATIONSHIP BETWEEN
ECONOMIC SECTORS
Real Sectors
Consumption
Investment
Export
Import
External Sectors
Current Account
Export
Import
Transfer
Income
Capital and Financial Transactions
Direct Investment
Financial Flows
– Government Sectors
– Private Sectors
International Reserves
Government Sectors
Government Budget
Government Revenue
Government Expenditure
Equilibrium (overall)
Sources of Funds
– Domestic
– Foreign
Monetary Sectors
Monetary Authority
Reserve
Money
Net Foreign Assets
Net Domestic Assets
Net Claim on Government
Commercial Bank
Source: PPSK BI, 2006
Net Foreign Assets
Net Domestic Assets
Money in
Circulation
VARIOUS TASKS OF CENTRAL BANKS
1.
2.
3.
4.
As bank-of the banks and insurer (lender of last
resort).
As a publicly owned or publicly controlled
corporation.
As a monopoly provider of public goods (a stable
currency and well-functioning payment system).
As a regulator that produces & enforces secondary
regulation & guideline relating to bank solvency,
entry and competition.
BALANCE SHEET OF
CENTRAL BANK
Reserve Money
Consolidated Balance Sheet of Central Bank
December 31, 2008
Sources of Reserve Money
Uses of Reserve Money
1. External Source:
1. Money outside bank
International Reserve
a. Currency held by the public
2. Internal Sources:
b. Private sector demand
deposits
a. Net Claims on Public Sectors:
2. Banks reserve
- Central Bank
a. Currency held by the banks
- Claims on Official Entities
& Public Enterprises
b. Banker’s Deposits
b. Claims on Deposits Money
3. Other Uses
Banks
c. Other sources
Total Sources
Total Uses
CENTRAL BANK IN SOME COUNTRIES (Warjiyo, 2004: 23)
Country
Monet. Authority
Bank Regulator
Payment System
Hongkong
Yes
No
No
England
Yes
No
No
Australia
Yes
No
Yes
Japan
Yes
Partly
Yes
USA
Yes
Partly
Partly
France
Yes
Partly
Partly
Netherlands
Yes
Partly
Yes
Italy
Yes
Partly
Yes
Germany
Yes
Partly
Yes
South Africa
Yes
Yes
No
Brasil
Yes
Yes
Partly
India
Yes
Yes
Partly
Singapore
Yes
Yes
Partly
Indonesia
Yes
Yes
Yes
Malaysia
Yes
Yes
Yes
Frisell et al (2004)
Frisell et al (2004)
Frisell et al (2004)
Frisell et al (2004)
Financial Independence
(Out of 26 cases)
Laws set upon the
bank that rules on the
allocation of profits to
reserves and
government, by
specifying a decision
making
process and/or
fixed shares or
amounts
88%
No laws regarding profit
8%
Other 4%
Frisell et al (2004)
The Governor is Appointed by
(Out of 41 cases)
Frisell et al (2004)
Number of Institutions Involved in the
Appointment Process
(out of 41 cases)
A more multi-faceted
appointment process
takes place
5%
Only one institution is
involved
27%
Frisell et al (2004)
One institution
appoints and another
advises or
recommends
36%
One institution
appoints and another
agrees
32%
Frisell et al (2004)
Frisell et al (2004)
STRUCTURE OF CENTRAL BANK
1. Federal Reserve System
2. Bank of China
3. Bank of Indonesia or Bank Indonesia
4. Bank of England
5. Bank of Japan
6. European Central Bank
7. Bank of Canada, etc
Mishkin (2003: Ch. 14), Warjiyo (2003).
The Formal Structure and Policy of the
Federal Reserve System
Source: Ritter at al. (2009: 331)
The Federal Reserve System
Source: Ritter at al. (2009: 332)
The Realities of Power Within the Federal
Reserve System
Source: Ritter at al. (2009:333)
Currency
Flow Before
the Reform in
China
Source:
Gang ,1994: 25
Bank Transfer
Money Flow
After the Reforms
in China
Source:
Gang ,1994: 26
Financial
Institutions in
China
Source:
Gang ,1994: 37
REFERENCES
Frisell, L., K. Roszbach and G. Spagnolo (2008), Governing the Governors: A
Clinical Study of Central Banks, Sveriges Riksbank Working Paper Series,
No. 221, May.
Gang ,Yi. 1994. Money, Banking & Financial Markets in China. Westview
Press
Hubbard, R.G. (2008), Money, the Financial System, and the Economy, Pearson
Education, Inc
Insukindro (2007), Penilaian Kekayaan Negara dan Daerah: Pendekatan
Triangulasi, Makalah Seminar Nasional Penilaian, Kerjasama DJKN Depkeu dan
MEP FE UGM, Yogyakarta, 9 Juni.
Mishkin, F.S. (2003), The Economics of Money, Banking and Financial Markets,
Addison Wesley
PPSK BI (2006), Modul Kebanksentralan.
Ritter, L.S., W.L. Silber and G.F. Udell (2009), Principles of Money, Banking &
Financial Markets, Pearson Education, Inc.
Warjiyo, P. (eds) (2004), Bank Indonesia Bank Sentral Republik Indonesia: Sebuah
Pengantar, PPSK Bank Indonesia