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The Eurosystem
The European System of Central Banks
The EurosystemThe European Central Bank
(ECB)
The National Central Banks (NCBs)
Why a system instead of a single CB?
Builds on existing competencies of the NCBs
Geographically large euro area National diversity
Major Tasks of the Eurosystem
Monetary policy Foreign exchange operations Operation of the payment systems Hold and manage foreign reserves
Other tasks of the Eurosystem
Advisory functions Collection and compilation of
statistics Contribution to prudential
supervision and financial stability Insurance of euro banknotes International cooperation
Objectives and tasks of the ECB Price stability Defining Eurosystem policies Deciding, coordinating and monitoring the
monetary policy operations Adopting legal acts Authorizing the issuance of banknotes Intervention in the foreign exchange
markets International and european cooperation
Other responsibilities of the ECB
Statutory reports Monitoring financial risks Fulfilling advisory functions of
community institutions and national authorities
Running the IT systems Strategic and tactical management
of the ECB’s foreign reserves
Tasks of the NCBs Execution of monetary policy operations Operational management of the ECB’s foreign
reserves Management of their own foreign reserves Operation and supervision of payment
systems Joint issuance of banknotes together with the
ECB Collection of statistics and providing
assistance to the ECB Functions outside the ESCB
Monetary policy
Philosophy of the European central banking
Short run vs. long run in macroeconomics
Long run neutrality of money Inflation – a monetary
phenomenon
Money supply and monetary base
Definition: The monetary base (MB) is the total amount of a currency that is either circulating in the hands of the public, or on the commercial bank deposits held in the central bank’s reserves:
Banknotes and coins in the hands of the public Reserves of the commercial banks in the central
banks MB = C + RMoney supply (MS): Banknotes and coins in the hands of the public Deposits at the commercial banks MS = C + D
The Money Tree
Deposit Multiplier – Maximum increase in money supply as a result of the increase in the reserves of the banking system
The Deposit Multiplier€ 1000 new reserves enter Commercial Bank “А”
Reserves(safety)
Loans (income)
200
800
160
640
128
512
1000 + 800 + 640 + 512 + …
dm = ΔD/ ΔR
The Money Multiplier
mm = MS/MB MS = C + D = C x D/D + D = D
(C/D + 1) MB = C + R = C + rrD + er = = C x D/D + rrD + er x D/D = = D (C/D + rr + er/D) mm = (C/D + 1)/(r + er/D + C/D)
Money multiplier vs. deposit multiplier
Deposit multiplier Dm = 1/rr Shows the maximum increase in the MS
as a result of an increase in reserves Money multiplier Mm = (C/D + 1)/(rr + er /D + C/D) Shows the actual increase in MS as a
result of an increase in reserves
Instruments of the monetary policy
open market operations, standing facilities, minimum reserve requirements for
credit institutions.
Standing facilities The Eurosystem offers credit institutions two
standing facilities: Marginal lending facility in order to obtain
overnight liquidity from the central bank, against the presentation of sufficient eligible assets;
Deposit facility in order to make overnight deposits with the central bank.
The interest rates on the marginal lending and deposit facilities normally provide a ceiling and a floor for the overnight market interest rate.