6 Ocak 2013 Pazar

Central Bank Independence Experiences from US (FED), UK (BOE) and Turkey (TCMB)

Federal Reserve Bank (FED)
Although USA is the biggest economy in the world, FED was founded so far later than most of the major economies in the world. Before 1907, the authority of the printing of money had been given to all national banks that accept the regulations in the federal laws. The banking panic of 1907 was the primary inspiration for major banking reform and with that reform all of the central banks were started to be directed by one central bank.[1] The Federal Reserve System, which serves as the nation's central bank, was created by an act of Congress. The System consists of a seven member board of governors with headquarters in Washington, D.C., and twelve reserve banks located in major cities throughout the USA.[2] Under the Federal Reserve Act of 1913 and amendments over the years, the Federal Reserve System: [3]
  • Conducts America’s monetary policy.
  • Supervises and regulates banks and protects consumers’ credit rights.
  • Maintains the stability of America’s financial system
  • Provides financial services to the U.S. Government, the public, financial institutions, and foreign financial institutions.
The independence of FED has been gone through an evolution since the foundation date. Important milestones are stated below:[4]
  • When Federal Reserve Act passed on 1913 it wasn’t independent as much as it is today, FED gradually became independent.
  • Congress eliminated the two government positions on the Board in 1936.
  • The length of the term of office for Board members was increased from the original 10 years to 12 years in 1933 and then 14 years in 1935.
 Bank Of England
The Bank of England was founded in 1694 to act as the Government's banker and debt-manager. Since then its role has developed and evolved, centered on the management of the nation's currency and its position at the centre of the UK's financial system.[5] This central bank is accepted to be the first modern central bank. When we come up to the independence, in May 1997 the Government granted the Bank of England operational independence allowing it to set domestic interest rates. However the government continued to retain the control of the final objective of monetary policy (The Government sets the inflation target within which the Bank must operate when carrying out monetary policy decisions).[6]

When we analyze the following figure the effect of the independence of the central bank to the interest rates are seen clearly. The interest rates which are at 7.5% in 1998 decreased down to 5% in 5 year period.

The interest rates in England
 (Source: Tutor2u)

Beyond the interest rate difference, there existed a sharp decrease in the inflation rates in five years. After 1997, the Consumer Price Index rates started to decrease from 4% to 1% in 2002. This decrease can be also seen in the following figure.


The CPI rates in England
 (Source: Tutor2u)

Central Bank of Republic of Turkey (In Turkish:TCMB)
TCMB’s prior objective is to protect the price stability.[7] Since the previous governments used this bank for their financial requirements, the independence of this bank became so popular in the late 1990s. After the crises occurred in 2001, it was believed that the independence of the central bank should be maintained to stable the prices before being a candidate for EU. [8] Therefore, with the law numbered as 4651 and dated as 25.04.2001, many amendments were done in order to maintain the independence of this bank. These sentences are stated below:[9]
·         “The primary objective of the Bank shall be to achieve and maintain price stability. The Bank shall determine on its own discretion the monetary policy that it shall implement and the monetary policy instruments that it is going to use in order to achieve and maintain price stability”,
·         “The Bank shall, provided that it shall not be in confliction with the objective of achieving and maintaining price stability, support the growth and employment policies of the Government”,
·         “The Bank shall determine the inflation target together with the Government and shall in compliance with the said target adopt the monetary policy. The Bank shall be the ultimate body authorized and responsible to implement the monetary policy”,
·        “The Bank shall, with the objective to achieve and maintain price stability, be authorized to utilize monetary policy instruments described in this Law and shall also be authorized to directly determine and implement other monetary policy instruments that it deems appropriate”,
·         “The Bank shall, under extraordinary conditions and in cases when the resources of the Fund are insufficient, be authorized to grant advance to the Savings Deposits Insurance Fund in accordance with the procedures and conditions that it shall determine”,
·         “The Bank shall be authorized and empowered to set forth and implement regulations pertaining to the duties and powers entrusted to it by this Law and legislation, and shall be authorized and empowered to supervise the compliance with these regulations and the accuracy of the information submitted at these establishments and institutions subject to the said regulations”.

After these regulations, if we look at the inflation rates in Turkish economy, we can see the following figure.  After the crises environment in 2001 the inflation rates have gone up to 68.5%. Due to the amendments in central bank law and the better management of the new central bank president the inflation rates decreased to the one digit levels

The CPI rates in Turkey
 (Source: TCMB, “Fiyat Endeksleri”, http://tcmbf40.tcmb.gov.tr/cbt.html)

With the decrease in the inflation, the interest rates of the treasury bonds decreased as well. These are stated in the following figure.

The Interest Rates in Turkey
 (Source: TCMB)

[1]Federal Reserve Bank of Minneapolis, “Federal Reserve History”, http://minneapolisfed.org/info/sys/history/
[2]FED, “The Board of Governors of the Federal Reserve System” http://www.federalreserve.gov/pubs/frseries/frseri.htm.
[3]Robert Longley, “The Federal Reserve System”, http://usgovinfo.about.com/library/weekly/aa081599.htm#banks.
[5]Bank Of England, “History”, http://www.bankofengland.co.uk/about/history/index.htm.
[6]Tutor2u, “Independence of Bank Of England” http://www.tutor2u.net/economics/content/topics/monetarypolicy/independent_boe.htm.
[7]TCMB, www.tcmb.gov.tr
[8]Burçin Çöl, “Merkez Bankalarının Bağımsızlığı”, Pivolka Journal, Vol.II, No: 9, p.5.
[9]4651 numbered and 25.04.2001 dated Act of Central Bank, Article. 4.

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