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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 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 • 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 policy Philosophy 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 Tree Deposit Multiplier – Maximum increase in money supply as a result of the increase in the reserves of the banking system
The Deposit Multiplier €1000 new reservesenter Commercial Bank “А” Reserves (safety) 1000 + 800 + 640 + 512 + … 200 Loans (income) 800 dm = ΔD/ ΔR 160 640 128 512
The 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.