Structure and Independence of Other Foreign Central Banks In contrast to the Federal Reserve System, which is decentralized into 12 privately owned district banks, central banks in other industrialized countries consist of one centralized unit that is owned by the government. Here we examine the structure and degree of independence of four of the most important foreign central banks: the Bank of Canada, the Bank of England, the Bank of Japan, and the European Central Bank. Bank of canada
Canada was late in establishing a central bank: The Bank of Canada was founded in 1934. Its directors are appointed by the government to three-year terms, and they appoint the governor, who has a seven-year term. A governing council, consisting of the four deputy governors and the governor, is the policymaking body comparable to the FOMC that makes decisions about monetary policy. The Bank Act was amended in 1967 to give the ultimate responsibility for monetary policy to the government. So on paper, the Bank of Canada is not as instrumentindependent as the Federal Reserve. In practice, however, the Bank of Canada does essentially control monetary policy. In the event of a disagreement between the bank and the government, the minister of finance can issue a directive that the bank must follow. However, because the directive must be in writing and specific and applicable for a specified period, it is unlikely that such a directive would be issued, and none has been to date. The goal for monetary policy, a target for inflation, is set jointly by the Bank of Canada and the government, so the Bank of Canada has less goal independence than the Fed. Bank of England
Founded in 1694, the Bank of England is one of the oldest central banks. The Bank Act of 1946 gave the government statutory authority over the Bank of England. The Court (equivalent to a board of directors) of the Bank of England is made up of the governor and two deputy governors, who are appointed for five-year terms, and 16 non-executive directors, who are appointed for three-year terms. Until 1997, the Bank of England was the least independent of the central banks examined in this chapter because the decision to raise or lower interest rates resided not within the Bank of England but with the chancellor of the Exchequer (the equivalent of the U.S. secretary of the Treasury). All of this changed when the new Labour government came to power in May 1997. At this time, the new chancellor of the Exchequer, Gordon Brown, made a surprise announcement that the Bank of England would henceforth have the power to set interest rates. However, the Bank was not granted total instrument independence: The government can overrule the Bank and set rates “in extreme economic circumstances” and “for a limited period.” Nonetheless, as in Canada, because overruling the Bank would be so public and is supposed to occur only in highly unusual circumstances and for a limited time, it likely to be a rare occurrence. The decision to set interest rates resides in the Monetary Policy Committee, made up of the governor, two deputy governors, two members appointed by the governor after consultation with the chancellor (normally central bank officials), plus four outside economic experts appointed by the chancellor. (Surprisingly, two of the four outside experts initially appointed to this committee were not British citizens—one was Dutch and the other American, although both were residents of the United Kingdom.) The inflation target for the Bank of England is set by the Chancellor of the Exchequer, so the Bank of England is also less goal-independent than the Fed. Bank of Japan
The Bank of Japan (Nippon Ginko) was founded in 1882 during the Meiji Restoration. Monetary policy is determined by the Policy Board, which is composed of the governor; two vice governors; and six outside members appointed by the cabinet and approved by the parliament, all of whom serve for five-year terms. Until recently, the Bank...
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