Chapter 14
ANSWERS TO QUESTIONS
1. Should central banks be privately or publicly owned? Explain.
There are two different views concerning the ownership of central banks. While publicly-
owned banks concentrate on public interest, privately-owned central banks are independent
2. How will growth impact the structure of the European Central Bank’s (ECB) decision-making
bodies?
If more countries join the European Union, the Governors of the national central banks of all
EU member states will become full members of the General Council of the ECB, which is
comprised of the President and Vice-President of the ECB. After new Member States adopt the
3. Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather
than one central bank, as done in other countries?
Because of traditional American hostility to a central bank and centralized authority, the
4. In what ways can the national central banks influence the conduct of monetary policy?
Central banks set up three interest-rates based on the inflation rate target: deposit facility rate,
refinancing rate, and marginal lending facility rate. They also use traditional monetary
5. Why is the European Central Bank (ECB) governed by three different bodies?
The three bodies are the Governing Council, the Executive Board and the General Council. The
General Council is a transitional body whose main task is to encourage cooperation. The body
6. Why have some countries rejected the single currency despite being full members of the
European Union?
Non-Euro central banks do not belong to the single currency system, but still have some
constraints due to a country’s EU membership, as they must coordinate their decisions with
7. Compare the structure and independence of the European System of Central Banks and the
Federal Reserve System.
Both systems are independent and decentralized. They use the same conventional monetary
tools. However, while the ECB’s focus is almost exclusively on price stability, the FED
considers employment and economic growth equally important. Due to the important role
played by national central banks in the EU and in particular, the German Bundesbank, the
8. What are the main difficulties encountered by the newly established central banks in
transition economies?
Prior to the 1990s, most transition nations possessed one state-owned bank that played the
dual role of a commercial bank and a central bank, while a few others already had a separate
9. What are the expected consequences of Brexit for the Bank of England?
The monetary policy conducted by the Bank of England is already independent from the ECB
since the United Kingdom doesn’t belong to the Eurozone. However, one consequence is that
10. The structure and the policy of the People’s Bank of China (PBoC) differentiate it from
traditional models of central banking systems. What are the main differences? What are the
consequences of the PBoC system for other economies?
The main goal of the PBoC is maintaining stability of the value of the currency. Other central
banks, however, usually focus on price stability. The People’s Bank of China requires from
commercial banks a reserve ratio that is mandatory and much higher than usual practices.
11. A central bank decides by how much an interest rate should be changed in order to restore
equilibrium. What are the tools it uses to take such decisions?
There is no correct answer. The trend after the global financial crisis has been to develop
formal approaches toward restoring economic equilibrium, which makes sense since
12. People in general welcome actions that maintain effective communication and promote
transparency, in particular when these involve public or quasi-public institutions. Can you
think of a reason why a more transparent communication strategy might be detrimental to a
central bank’s objectives?
There are at least two interconnected reasons. First is the lack of financial literacy of the
public. On behalf of transparency, there is a risk to address an audience that is not able to
13. Why might eliminating the central bank’s independence lead to a more pronounced political
business cycle?
The lack of independence of a central bank means that instead of focusing on long-term
public interest, central bank decisions are grounded in a political cycle. Board members are
14. William does not feel comfortable with the current level of the European Central Bank’s
independence. Put yourself in William’s shoes and state an argument against the current
level of the European Central Bank’s independence.
Examples of arguments that can be presented by students include:
a. The ECB’s monetary policy is centered on a 2% inflation target. The previous ten years
show that it is not successful in reaching the target.
15. How would you argue in favor of the current trend toward central banks’ independence?
The most important argument in favor of the trend towards central banks’ independence is
the growing body of theoretical and empirical evidence which suggests that more
16. “The independence of the central bank has meant that it takes the long view and not the short
view.” Is this statement true, false, or uncertain? Explain your answer.
It is uncertain. Although independence may help the Fed take the long view, because its
personnel are not directly affected by the outcome of the next election, it can still be