ECON 330 Chapter 13: Central Banks and the Federal Reserve System

Vocabulary-style flashcards covering the structure, independence, and functions of the Federal Reserve and other global central banks based on Chapter 13 lecture notes.

Post-$1836$ Banking Environment

The period following the expiration of the charter of the Second Bank of the United States where no lender of last resort existed to provide reserves to the banking system.

Federal Reserve System Structure

Comprised of $12$ regional Federal Reserve banks rather than a single central bank to ensure power was not centralized in a single location.

Federal Reserve District Boundaries

Changing these boundaries would require Congress to rewrite the Federal Reserve Act, potentially creating opportunities for political interference.

Checks and Balances

A design feature of the Federal Reserve System intended to diffuse power due to public hostility and fears of centralized authority.

Regional Federal Reserve Banks Functions

Responsible for clearing checks, withdrawing damaged currency, issuing new currency, and acting as liaisons with the business community.

Board of Governors

A group within the Fed that establishes reserve requirements, effectively sets the discount rate, and sets margin requirements.

Board of Governors Terms

Members serve fourteen-year non-renewable terms, though seats may remain vacant for years due to an arduous and lengthy political approval process.

Federal Open Market Committee (FOMC)

The body that meets $8$ times a year and advises on reserve requirements while determining open market operations.

Federal Funds Rate

The specific interest rate charged on overnight loans from one bank to another.

Open Market Operations

Considered the most important policy tool the Fed possesses for controlling the money supply.

Instrument Independence

The ability of a central bank to set the specific instruments used for monetary policy, such as reserve requirements.

Goal Independence

The ability of a central bank to set the actual goals of monetary policy, such as price stability or low unemployment.

Fed Financial Independence

The Fed's unique independence stems from having a source of revenue and net earnings that is free from the congressional appropriations process.

Public Interest View

A perspective of central bank behavior suggesting that the objective of the bureaucracy is to maximize the public's welfare and efficiency.

Theory of Bureaucratic Behavior

A theory suggesting that the Federal Reserve acts to maximize its own welfare, avoid blame, and gain regulatory power over more banks.

Political Business Cycle

A phenomenon where a politically exposed Fed might focus on short-run objectives, engaging in expansionary policies to lower unemployment before an election.

European Central Bank (ECB)

Regarded as more independent than the Fed because its charter can only be changed by revision of the Maastricht Treaty rather than simple legislation.

Eurosystem Goal

The clearly specified long-term objective of achieving price stability.

Bank of England (Pre-$1997$)

Historically lacked independence because the power to set interest rates was determined exclusively by Her Majesty's Treasury.

Bank of Canada

On paper, it possesses less instrument independence and less goal independence than the Federal Reserve.

Bank of Japan

An independent central bank with the single specified goal of price stability.

European System of Central Banks (ESCB)

Structured similarly to the Fed in that the central banks for each country have roles comparable to the Federal Reserve banks.