19 Mar 2018
The central bank is the national currency issuers, is country's bank, is bank's bank. Different countries have different central bank structure and mission. Different structure and mission will influent the independence of the central bank.[documents] Therefore, this topic mainly around the ECB, FDS, PBOC and BOJ to compare their structure and mission. Specific analysis following aspects: capital structure, power structure, organization form, operation and supervision department, objective and monetary policy tools. Using these contains to analysis the influence of these aspects for central bank independence. It will mainly compare to the similar and difference between these four central bank.
Our results indicate that power structure is the main factors influencing the independence of central bank. The capital structure has no great effect to its independence. Due to the nature of central bank, different central banks have similar missions. Their monetary tools are also very similar, mainly through open market operations and reserve requirements. Finally, we find that European central bank have highest independence in comprehensive view.The second highest independence is FRS. PBOC has lowest independence between these four central banks. The main reason is that PBOC is the only one directly belong to thethe State Council. It means PBOC is a government apartment. But there also have other influent factor about independence which analysis in the article.
As the main implement institutions of monetary policy in a country, central bankshas a very important position for the country's economic development. Meanwhile, it has a vital influence for the social employment security stability and price stability.Due to the different economic backgroundand organization structure in the different country, its structure and the mission of the central bank is not entirely same. Therefore, this report mainly compared the similarities and differences between four central banksthrough detailed analysis their structure and functions.At the same time, this article aims to discuss whether these differences will bring different level of central bank independence. Central bank independence is a significant problem. Lots of previous academic studies have shown that independence is an important factor to influence the national inflation rate.
Additionally, the structure of this paper is as follows. Section 2 provides a literature review on the different aspect and effect of central bank structure and mission. Section 3 explains the specific aspect of structure and mission in our case study. It has 3 parts, capital structure, power structure, missions and independence of central bank. Section 4 is a summary of the paper's findings.Previewing our results, we find that missions of central bank are similar because of the central bank nature.Asã€€the same time, difference power structure will lead different independence, then affect monetary policy and the rate of inflation.
2. Background Literature
According to the existing literature in central bank structure, as Schoenmaker (2013) points out, it can divided into several aspects: Banks' capital structure and quantity, level of economic development, level of central bank independence. ButD. Schoenmaker (2013) mainly through the analysis of inflation index to evaluate independence, because the central bank’s common methods is through monetary policy to control inflation then keep the economic stability.
First, about central bank capital aspect, animportant research results isCBFS modelwhich created byPosso and Tawadros (2013).It shows that central Banks' capital strength and the rate of inflation is inversely related. But, in oppose, another view fromStella (1997)thinks that the central bank does not need a lot of capital because it is hard become bankrupt.However, in our opinions, enough capital can give central Banks greater ability to face risk. Therefore, based on this view, we will compare the capital structure between ECB, FED, PBOC and BOJ.
After that, we reviewed power structure of central bank aspect. It is mainly around the external organizational form and branch institutions. Meanwhile, we consider different central bankstructureand task determines its independence. At present, we find that a lot of economics research thinks that independence and inflation rate is negative correlation. One of results fromArnone and Romelli (2012)has great guiding significance .Arnone and Romelli(2012) not only test the developed countries central banks, like FED,BOJ. Their panel data also included lots of central banks from developing countries. But, however, they do not compare the difference between developing country and developed country. So, our research will pay more attention to this problem.
Thirdly, review the literature for central bank mission research, Schoenmaker (2013) was made research and analysis for this. He considers central Banks have two major objectives: monetary stability and financial stability in the traditional views.But we find that many countries have modified its development goalsmany timesin recent decades, especially the reform of PBOC in 2003.Because the development of economic. So, our research will use our four countries latest laws and regulations as a basis to comparison their mission.
3.1 Capital Structure
Capital funds of central bank offered from the state or private or both. The source of capital funds will affect central bank system. It can be separate to state-owned, half state-owned and private-owned..
The capital structure of PBOC is quite single. It is fully owned by the state.In Article 8 of the people's bank of China act (2003) point out that all the capital of PBOC are invested by the state, it shall be owned by the state. Nowadays, PBOC’s reserves areUS$3.201trillion.
Meanwhile, BOJ capital structure is half state-owned. Bank of Japan is capitalized at 100 million yen in accordance with the Act. About 55 percent of the capital is subscribed by the government. Banking Act from Japanregulated that the BOJ do not set shareholders' meeting. Shareholders can not join BOJ's operation.Shareholders' rights is only to get dividends per year and highest do not exceed 5%.
The FRS is private equity capital form. All capital provided by private shareholders investment, after authorized by the government, then to perform the function of central Banks.FRScapital funded by12member Banks of federal reserve bank. Thesemember bank subscribe shares, get dividend per year in accordance with the stake, the highest dividend do not exceed 6%.
ECB isSimilar to FRS. Itis also has share subscription, but all of share hold by member states in European Union. The amount of capital contribution is decided according to each member’s GDP proportionand populationproportion in EU.The ECB’s capital amounts to€5billion.Reserves are 526 euro in total now.
It can be find that only PBOC capital provided by government. Other three central banks have stock subscription. ECB is most similar than FED, all of capitalare funded by member banks or national member banks. However, this part only compared capital structure and reserves between these four banks. It is unable to see that the capital structure influence on independence, so later will compare the power structure
3.2 Power Structure
3.21 External Organizational form and branch institutions
PBOC and the BOJ are unit central bank system. It means that a country only to set up a unified central bank to exercise power and dutyof the central bank. Central bank itself is unified, its branch institutions generally direct managed by central bank. Most countries adopt the wayat present. Because this mode is conducive to national manage and macroeconomic control. As the same time, it is obviously to limit level of branch institutions independence at central bank. FRS power structure is different from Japan and China.It use dual central bank system, means that the central bank system is composed of two parts: central (the board of governors) and local (member of Federal Reserve Bank). These two parts are relatively independent. The board of governorsis the highest financial decision-making body. Local accept the supervision from central. But local has rights in the concrete implementation and daily operation. So, local have their own independence. The Federal Reserve System divides 12 areas, each area to set up a federal reserve bank. These 12 banks have independence in their own area. Additionally, ECB is Multinational central bank system. ECB and 27 national central banks compose to ESCB. National bank has own independence.
So, we can find that ECB has highest level of independence because it not control by any government or state. The local also have own independence to operate. Similarly, FRS also has high independence level.
3.22 Inside Financial manage and supervision
Although central bank not operate for profit, but itstill hasoperating income.
Among these four central banks, BOJ and FRS revenue will belong to their country's ministry of finance after dividends payment. Dividends payment proportion has been given in Section 3.1. In addition, at internalsupervision aspect, they have own supervision department respectively. At external supervision, it mainlysupervised fromgovernment with legal methods. Seminally, PBOC's all profits also belong to the ministry of finance in China, same as Japan and US. But supervision aspect, China was explicitly stipulated in the law amendment in 2003(PBOC's Act): the PBOC as a department under the state council of China, belong to the government departments. So, PBOC isdirectly regulated and supervise fromgovernment.
ECB is different than other three banks, it has own financial independence. Operate revenue control by itself. ECB can make own budget. In supervision aspect, it accepts European Union rules. ECB should take responsible to offer report to European Parliament, the European Commission, and the Council of the European Union. But ECB do not control byany country or government. So, obviously, ECB have more independence in financial aspect than others.
As a non-profit financial institutions,the mission ofthese central banktrends to be consistent: play its functions effectively andachieve their core goal. The main way is through monetary policy, to keep price stability, to promote economic development.
According to the ECB official website state, the European Central Bank and the national central banks together constitute the Euro system. The main objective of the Euro system is to maintain price stability: safeguarding the value of the euro.
In Japan, the Act sets the BOJ's objectives is ‘to issue banknotes and to carry out currency and monetary control’ and ‘BOJ shall be aimed at achieving price stability’
Similarly in China, the Act of PBOC (2003) points out that PBOC’s missions are: to formulate and implement monetary policy, to maintain price stability, to provide financial services. In the US, the Board of Governors of the FRS and the Federal Open Market Committee shall ‘maintain long run growth of the monetary and credit aggregates commensurate to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. (1977 Federal Reserve Reform Act specified)
Monetary policy tools
Open market operations
Open market operations
Open market operations
To sum up, we could find that these central bank’s missions all around to keep price stability. It is determined by the central bank’s nature. But their also has some different. For instance, the US also clearly point out FRS should maximum employment and moderate long-term interest rates. Similarly, their monetary policy tools also trends to be consistent, all mainly to use two methods: open market operations and reserve requirements.
As background literature described, independence is an important aspect to the central bank. This part is extended based on above analysis, to compare these several central bank independence.
In the angle of structure, despite these four central banks has different capital structure, but it didn't have obvious effect to independence. Because shareholders do not to participate operations, only charge a small amount of dividends.
In organizational form aspect, BOJ and PBOC independence is lowest. American'sdual central bank systemgives more independence between the central and local. In this aspect, ECB system is similarly with FRS.
In financial aspect, the biggest independent central bank still is ECB. Becauseother three central bank’s revenues are belong to their national Treasury. About supervision, except PBOC is directly control by government, other three central banks have great independence. They have their own internal supervision mechanism and external legislative intervention by the government.
On the whole, we find that ECB, BOJ, FRD and PBOC missions are consistent. It is mainly around to keep price stability. Through the contrast of central bank's objective and monetary tools also reflects their similarity. With the research of central bank structure and independence, ECB has highest independence,resemble to FRS.It should be mention that the ECB does not public members vote process, so the independence has been questioned in recent years. However, it is no doubt that the worst independence of central bank is PBOC. It is mainly caused by nationalization of the structure.
In addition, our study is based on theoretical angle, around power structure and missions’ analysis, to evaluate its independence. It has not using quantitive data.But reference toMasciandaro,ect.(2008)released specific quantitative rating of the independence of the central bank, (A total of 19 criteria are identified to assess the degree of supervisory independence, and 21 for accountability.) the data are consistent with our analysis. They measured thatPBOC independence index is 0.47 and BOJ is 0.34. ECB and FRS independence is significantly higher. Thus, it could prove our results correctness.
Arnone, M., & Romelli, D. (2012). Dynamic central bank independence indices and inflation rate: a new empirical exploration.Paolo Baffi Centre Research Paper, (2012-118).
Masciandaro, D., Quintyn, M., & Taylor, M. W. (2008). Inside and outside the central bank: Independence and Accountability in Financial Supervision: Trends and Determinants.European Journal of Political Economy,24(4), 833-848.
Posso, A., & Tawadros, G. B. (2013). Does greater central bank independence really lead to lower inflation? Evidence from panel data. Economic Modelling,33, 244-247.
Schoenmaker D. (2013),Chapter 28 -Central Banks RoleinFinancial Stability HandbookofSafeguarding Global Financial Stability,271-284
Stella, P. (1997).Do central banks need capital?. International Monetary Fund.
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