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CENTRAL BANK
Lecturer:
Prof. Insukindro, Ph.D
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CONCEPT OF CENTRAL BANK - Hegemonic system - Non profit institution
THEORY OF CENTRAL BANK
A B C D
m n
XI II
CB
Case 1: Transmission Role
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THEORY OF CENTRAL BANK
A(+)
B(-)
C(+)
D(-)
I II
CFI
FI 2FI 1
Case 2: Intermediation Role
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FUNCTIONS OF CENTRAL BANK
Micro approach:
- Club theory, Banker’s bank or lender of last resort
- To maintain stability in the banking system.
THEORY OF CENTRAL BANK
A B C D
I II
CB
CoB2CoB1
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MACRO APPROACH ~ Monetary Authority- Domestics
Internal balance: g, π, μ- to preserve the value of the currency- to formulate & implement monetary
policyThe relationship between Central Bank and government and other financial institutions.
- InternationalExternal balance: BOP = 0Exchange rateInternational Financial Institutions
THEORY OF CENTRAL BANK
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Financial System
Households Firms Government
Borrowers
Households Firms Government
Savers
Returns
Funds
Returns
Funds
Funds
Returns
Returns
Funds
Central Bank’s role in the flow of funds
Source: PPSK BI, 2006, Insukindro (2007) and Hubbard (2008: 39), modified,
Government /Central BankInvolvement
Financial Intermediaries
Financial Market
Infrastructure and Environtment
6
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Financial System
Households Firms Government
Borrowers / Demanders
Households Firms Government
Savers / Suppliers
Returns
Funds
Returns
Funds
Funds
Returns
Returns
Funds
Key Services Provided by the Financial System
Source: PPSK BI (2006); Insukindro (2007) and Hubbard (2008:39, 41), modified
Financial Market
7
Information
Risk Sharing Liquidity
Government /Central Bank/
Financial Authority
Involvement
Infrastructure and Environment
Financial Intermediaries
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External Sectors
Current AccountExportImport
TransferIncome
Capital and Financial Transactions
Direct InvestmentFinancial Flows
– Government Sectors– Private Sectors
International Reserves
Real Sectors
ConsumptionInvestmentExportImport
Government Sectors
Government BudgetGovernment RevenueGovernment ExpenditureEquilibrium (overall)Sources of Funds– Domestic– Foreign
Monetary Sectors
Monetary AuthorityNet Foreign AssetsNet Domestic AssetsNet Claim on Government
Commercial BankNet Foreign AssetsNet Domestic Assets
Reserve Money
Money in Circulation
INTER-RELATIONSHIP BETWEEN ECONOMIC SECTORS
Source: PPSK BI, 2006
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VARIOUS TASKS OF CENTRAL BANKS1. As bank-of the banks and insurer (lender
of last resort).2. As a publicly owned or publicly controlled
corporation.3. As a monopoly provider of public goods (a
stable currency and well-functioning payment system).
4. As a regulator that produces & enforces secondary regulation & guideline relating to bank solvency, entry and competition.
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BALANCE SHEET OF CENTRAL BANK
Reserve MoneyConsolidated Balance Sheet of Central Bank
December 31, 2008
Sources of Reserve Money Uses of Reserve Money
1. External Source: International Reserve2. Internal Sources: a. Net Claims on Public Sectors: - Central Bank - Claims on Official Entities
& Public Enterprises b. Claims on Deposits Money
Banks c. Other sources
1. Money outside bank a. Currency held by the public b. Private sector demand
deposits2. Banks reserve a. Currency held by the banks b. Banker’s Deposits3. Other Uses
Total Sources Total Uses
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CENTRAL BANK IN SOME COUNTRIES (Warjiyo, 2004: 23)
Country Monet. Authority Bank Regulator Payment System
Hongkong Yes No No
England Yes No No
Australia Yes No Yes
Japan Yes Partly Yes
USA Yes Partly Partly
France Yes Partly Partly
Netherlands Yes Partly Yes
Italy Yes Partly Yes
Germany Yes Partly Yes
South Africa Yes Yes No
Brasil Yes Yes Partly
India Yes Yes Partly
Singapore Yes Yes Partly
Indonesia Yes Yes Yes
Malaysia Yes Yes Yes
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Frisell et al (2004)
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Frisell et al (2004)
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Frisell et al (2004)
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Frisell et al (2004)
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Financial Independence(Out of 26 cases)
Laws set upon thebank that rules on theallocation of profits to
reserves andgovernment, by
specifying a decision making
process and/orfixed shares or
amounts88%
No laws regarding profit8%
Other 4%
Frisell et al (2004)
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The Governor is Appointed by(Out of 41 cases)
Frisell et al (2004)
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Number of Institutions Involved in the Appointment Process
(out of 41 cases)
A more multi-facetedappointment process
takes place5%
Only one institution isinvolved
27%
One institutionappoints and another
advises orrecommends
36%
One institutionappoints and another
agrees32%
Frisell et al (2004)
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Frisell et al (2004)
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Frisell et al (2004)
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STRUCTURE OF CENTRAL BANK
1. Federal Reserve System2. Bank of China3. Bank of Indonesia or Bank Indonesia4. Bank of England5. Bank of Japan6. European Central Bank7. Bank of Canada, etcMishkin (2003: Ch. 14), Warjiyo (2003).
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The Formal Structure and Policy of the Federal Reserve System
Source: Ritter at al. (2009: 331)
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The Federal Reserve System
Source: Ritter at al. (2009: 332)
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The Realities of Power Within the Federal Reserve System
Source: Ritter at al. (2009:333)
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Currency Flow Before
the Reform in China
Source:Gang ,1994: 25
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Bank Transfer Money Flow
After the Reforms in China
Source:Gang ,1994: 26
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Financial Institutions in
China
Source:Gang ,1994: 37
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REFERENCESFrisell, L., K. Roszbach and G. Spagnolo (2008), Governing the
Governors: A Clinical Study of Central Banks, Sveriges Riksbank Working Paper Series, No. 221, May.
Gang ,Yi. 1994. Money, Banking & Financial Markets in China. Westview Press
Hubbard, R.G. (2008), Money, the Financial System, and the Economy, Pearson Education, Inc
Insukindro (2007), Penilaian Kekayaan Negara dan Daerah: Pendekatan Triangulasi, Makalah Seminar Nasional Penilaian, Kerjasama DJKN Depkeu dan MEP FE UGM, Yogyakarta, 9 Juni.
Mishkin, F.S. (2003), The Economics of Money, Banking and Financial Markets, Addison Wesley
PPSK BI (2006), Modul Kebanksentralan.Ritter, L.S., W.L. Silber and G.F. Udell (2009), Principles of Money, Banking &
Financial Markets, Pearson Education, Inc.Warjiyo, P. (eds) (2004), Bank Indonesia Bank Sentral Republik Indonesia: Sebuah
Pengantar, PPSK Bank Indonesia