Financial Markets, Banking, and Monetary Policy

CHAPTER 12 Central Banking and the Federal Reserve

WHAT YOU WILL LEARN IN THIS CHAPTER

• What central banks are and how they came about.
• Where the U.S. central bank—the Fed—fits into our structure of government.
• How the Fed is a blend of a federal agency and privately owned Reserve Banks.
• Who are the key officials in the Fed.
• What central banks do and why they have become extremely important policymaking organizations.
• What gives the Fed more independence than other governmental entities and why.
• The importance of accountability and transparency for independent central banks in democratic systems.
• The basic instruments available for implementing monetary policy.
• How the central bank uses all of these instruments to set a short-term interest rate.
• How the financial crisis has changed the way in which monetary policy is implemented.

BACKGROUND

What are central banks and why do they get so much attention these days? Indeed, why do observers hang on every word and its intonation by key central bankers? Are they part of the government? If so, why are they so different than other parts of the government and do they coordinate their policies with those of the rest of the government? Do their responsibilities go beyond monetary policy? How are these powerful figures selected?

Central banks around the globe are among the most important and have become the most closely watched policymaking institutions. They typically have primary responsibility for achieving macroeconomic objectives ...