CENTRAL BANK

Lecturer:

Prof. Insukindro, Ph.D

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

THEORY OF CENTRAL BANK

A(+)

B(-)

C(+)

D(-)

I II

CFI

FI 2FI 1

Case 2: Intermediation Role

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

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

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

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

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

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.

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

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

Frisell et al (2004)

Frisell et al (2004)

Frisell et al (2004)

Frisell et al (2004)

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)

The Governor is Appointed by(Out of 41 cases)

Frisell et al (2004)

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)

Frisell et al (2004)

Frisell et al (2004)

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).

The Formal Structure and Policy of the Federal Reserve System

Source: Ritter at al. (2009: 331)

The Federal Reserve System

Source: Ritter at al. (2009: 332)

The Realities of Power Within the Federal Reserve System

Source: Ritter at al. (2009:333)

Currency Flow Before

the Reform in China

Source:Gang ,1994: 25

Bank Transfer Money Flow

After the Reforms in China

Source:Gang ,1994: 26

Financial Institutions in

China

Source:Gang ,1994: 37

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