Post on 29-Mar-2015
transcript
The Operational Role of the Bank of England
Guo Chenzi Nov.8
The Structure of Bank System
Central Bank
Exchange market
Money market
Gilt market
Part I the objectives of Bank’s market operation
Part of government’s overall economic strategies
Fulfill the monetary of price stability
Part II The Foreign Exchange Market
Question 1: What is the role of central bank under gold standard?
Question 2: What is the role of central bank under a floating exchange rate standard?
Q1
Assumption:1. Domestic currency is maintained at a
fixed rate against an external standard.
2. No government in the market could control such standard.
Q1:The market clearing condition
Priority is given to maintain the ratio between par value of money and gold
Increasing the money supply according to the gold reserve.
Central bank loses independent monetary policy.
Q1:the role of central bank
The central bank, under the gold standard in the exchange market, could do nothing but just maintain such commitment that the price of domestic currency is fixed to a particular level.
Q2:
Features in the market:
The price of domestic currency is basically determined by supply and demand in the market.
Government can intervene the market
Q2:the role of central bank
Central bank has independent monetary policy
Central bank could control exchange rate to some extent by selling or buying domestic currency.
Q2:two puzzles
1. Whether could the central bank foresee the appropriate equilibrium?
2. What determine the ability of central bank to intervene exchange market, especially while they want to achieve the interest rate stability?
Part III The Money Market
The Bank’s operational aim
is “to keep very short-term interest rates within an unpublished band”, which would be determined by the authority with a view to achieve their monetary objectives.
Two major questions:
1. What influence the operators in the Bank have upon money market interest rate?
2. How far these operators should concentrate their influence upon the quantity of cash in the system, rather than directly upon interest rate?
What we will discuss below about the money market.
Mechanics of the present arrangements designed in 1981
Problems of the 1981’s arrangements
Relationship between cash flow and interest rate
Mechanics of the present arrangements designed in 1981(1)
Cash flowDuring the day, two things happen
Government the amount of people using
commercial banks
Bank forecasting its likely cash position
maintain operation balances at the bank
Mechanics of the present arrangements designed in 1981(2)
Cash flowat the end of the day
Every bank settle their
net difference with each
other
Difference is settled by debit
or income at Bank
Mechanics of the present arrangements designed in 1981(3)
Bank influence
short-term
interest rate in
two ways
Buy 3 months bills price of bill interest rate
Policy implication, such as Green Span’s secret
smile
Mechanics of the present arrangements designed in 1981(4)
Cash flow from government to others
Discount market
Debt market
Call back depositsPlaced with others
Selling bills
Commercial banks
Problems of the 1981’s arrangements (1)
1. The balances yield no interest at Bank. So, we should have to ask why banks should maintain its balance? (the incentive problem)
2. Sales of government debt cause regular and substantial shortage of cash
Problems of the 1981’s arrangements (2)
3. The influence of the authority is both visible and substantial.
A sudden supply of money in the
market
Reluctant to increase the interest rate
Open market operation to maintain the interest rate
(visible effect)
Change the expectation of financial institutions (substantial effect)
Relationship between cash flow and interest rate (1)
The trade-off banks have to face with:Holding enough
assets convertibleMinimize the
opportunity cost
The equilibrium is determined by the attitudes of central bank
Relationship between cash flow and interest rate (2)— pegged interest rate
Proponents① In practice, pegged
interest rate is inclined to achieve monetary target.
② Market force in the present UK bank system could put pressure on such bias
Y
X
Q1 Q2
i
Q
Relationship between cash flow and interest rate (3)— Monetary Base Control
Proponents 1. Money would vary pro-cyclicallyDemand of credit P i
i is determined by market
2. In practice, there is political difficulty of raising interest rate
Relationship between cash flow and interest rate (4)— Monetary Base Control
Opponents 1. Inelasticity of cash demand to
interest rate
2. Interest rate could be more volatile
A further discussion
Which one, between pegged interest rate and monetary base
control, in your opinion, is better?
Part IV Gilt Market
The history of the gilt market
The role of central bank in the market
The problem about such operation
The history of the gilt market
World War I & II massive accumulation of debt to fund
government deficits
After wars fund fiscal deficits monetary purposes
The role of central bank in the market
when banks is over-funding the private sector,
Central bank
Raise medium term interest rate
Selling more public sector
debts
Restrain bank lending
Offset the immediate impact
on monetary aggregate
The problem about such operation
Decrease the cash in the bank system, while decreasing the deposits in banks
The cooperation between Bank and Treasury in other nations
Part V something more about ECB
European System Central Bank
European CentralBank
Central Banks of the participating
EU nations
Central Banks of the non-participating EU
nations
IndependentPolicy
Not member in the ECB’s government
council
Government council Executive board
The reason of such structure of ESCB
The establishment of a single central bank for the whole euro area would not have been acceptable on political grounds.
The Eurosystem approach builds on the experience of the NCBs, preserves their institutional set-up, infrastructure and operational capabilities and expertise;
Given the large geographic area of the euro area, it was deemed appropriate to give credit institutions an access point to central banking in each participating Member State.
Thank you!
Zhou WeiChen YuXu Ting
Guo Chenzi