Term Paper FEDERAL RESERVE AND ECB

Topics: Monetary policy, Central bank, Federal Reserve System Pages: 10 (2297 words) Published: February 5, 2015


Comparing the Federal Reserve and European Central Bank
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Introduction
Redshank was the pioneer of operation of central banks way back in 1668. The Federal Reserve was started in 1913 joining the long list of 20 more central banks that had been created before. The growth in the number of central banks later was mainly due to decolonization and the fall of the Soviet Union. The European Central bank was then created in 1998. Initially, the principle purpose of the central banks was to serve as the governments’ banker (Scheller, 2006). However, by the time the Federal Reserve was being established, their roles had expanded to providing stability for commercial banks, as well as other financial systems. Presently, Federal Reserve banks have been allocated the main task of formulating a monetary policy while the rest of the functions are given to the national central banks (Pollard, 2003). Since the signing of the Maastricht Treaty in 1993, the attention has been on the balancing of independence of the central banks with transparency and accountability. The European central bank and the Federal Reserve Bank share and differ in aspects like monetary policies, the process of decision-making and their respective structures. Institutional Structure

The Federal Reserve Act provided for the creation of a central bank for the US. This bank was to be comprised of twelve District Federal Reserve Banks and a Federal Reserve Board made up of seven members. The Federal Reserve Board was created in Washington DC, but was later renamed to the Board of Governors of the Federal Reserve System in 1935 (Pollard, 2003). On the other hand, the European system is made up of fifteen central banks and an executive board that comprises of six board members. The 15 members of the system represent the fifteen states that make up the European Union. The twelve central banks of member countries together with the ECB make up the Euro system (Scheller, 2006). In contrast, the federal system consists of 12 districts that do not represent individual countries. For the Federal Reserve System, the board of governors is made up of members that are nominated by the American president, although the nomination of these members has to be confirmed by the Senate. Both the Chairperson and the deputy are nominated by the president from among the appointed members of the board, but must be confirmed by the Senate. However, sometimes the appointments for these two positions are made simultaneously with the boards’ appointment (Pollard, 2003). For the executive board, all board members must agree on the appointments. Independence from the governments

Even though both the European system and the Federal system offer financial services to the government, the European system has been given independence by the member states’ governments. For instance, the governing council has full control of the monetary policy tools and is not allowed to take advice from member states on the same. Additionally, the terms of office that were set for the executive board members are fixed to avoid political interference (Pollard, 2003).

Prior to the inclusion in the Eurosystem, any national bank has to be independent. The Maastricht treaty that also ensured that ECB itself was independent catered for all this. These interventions were based on the studies, which proved that the degree of independence and the inflation in the member states are inversely related (Scheller, 2006). These studies further showed that lowering inflation rate did not have to be at the expense of the country’s’ growth. These studies dramatically changed central banks’ legal status by reducing the government’s influence and shifted the focus to price stability. Initially, the independence of the Federal Reserve Board was not guaranteed. In fact, both the Treasury Secretary and the Comptroller of the currency were also members of the...

References: Bernanke, B. (2009). The Crisis and the Policy Response. Retrieved from http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm
Chadha, J. & Holly, S. (2011). Interest Rates, Prices and Liquidity: Lessons from the Financial Crisis Macroeconomic Policy Making. Cambridge: Cambridge University Press,
ECB. (2010). ECB monthly bulletin, ECB’s response to the financial crisis. Retrieved from: http://www.ecb.int/pub/pdf/other/art1_mb201010en_pp59- 74en.pdf
FRBSF. (2009). The Fed’s monetary Policy Response to the Current Crisis. Retrieved from: http://www.frbsf.org/publications/economics/letter/2009/el2009-17.html
Ngin, C. & Längin C. (2011). The European Central Bank and the Federal Reserve System - a General Comparison. Munich: GRIN Verlag,
Pollard, P. (2003). A look inside two central banks: the European Central Bank and the Federal Reserve. Federal Reserve Bank of St. Louis. Journal Review, 85(1): 11- 30. Retrieved from: http://research.stlouisfed.org/publications/review/03/01/Pollard.pdf
Scheller, H. (2006). The European Central Bank: History, Roles and Functions. Retrieved from: www.ecb.int/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf
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