CENTRAL BANKS: FEDERAL RESERVE AND MONETARY AUTHORITY OF SINGAPORE

PHANG JING YI KRYSTAL CHEW

AGENDA
History
Introduction Comparing USA and Singapore Federal Reserve VS MAS Independence from government Tools Used Reaction to the financial crisis Moving forward

HISTORY

HISTORY
Swedish Riksbank established in 1668 Other banks established after some time were also private entities with banking activities Conflict between public policy objectives and financial interests Dropping of commercial objectives by central banks

HISTORY
First Bank of the United States: 1791-1811
Conceived in 1790 to deal with the war debt and to put the government on sound financial footing In 1811, the bank ceased operations

Second Bank of the United States: 1816-1836

With the War of 1812, federal debt began to mount again However, President Andrew Jackson refused to renew the Bank's charter in 1832 Charter expired in 1836

US Federal Reserve: 1913- Present

New bank would be a largely public institution Designed a decentralized central bank to prevent the concentration of power.

HISTORY
Monetary Authority of Singapore (MAS): Created in 1971 Regulate the monetary, banking and financial aspects of Singapore Before its existence, its functions were conducted by government departments and agencies

INTRODUCTION
A financial institution that has control over a countrys monetary policy
Several mandates including:

Issuing national currency Maintaining the value of the currency Controlling credit supply Last-resort lender Governments banker.

Definition Objective

Tools

INTRODUCTION

Low rate of inflation

High employment

Sustainable economic growth

Financial stability

Definition

Objectives

Tools

INTRODUCTION

Tools:

Open Market Operations Discount Rate Reserve Requirements Selective Credit Control Moral Suasion

Definition Objective

Tools

COMPARING USA AND SINGAPORE

Size of economy
Singapore has a GDP of $251.5 billion (2010) while US has a GDP of $14.526 trillion (2010)

COMPARING USA AND SINGAPORE

Way to gain revenue:
Singapore relies on exports and imports USA relies on manufacturing and financial services

COMPARING USA AND SINGAPORE

Structure of Fed and MAS
Fed comprises of the Board of Governors, 12 regional Reserve Banks, as well as the Federal Open Market Committee (FOMC) Singapore has a simpler structure with only MAS Impact of Financial Crisis US was badly hit, and fell into deep recession Singapore was less badly hit, but recession was unavoidable

FEDERAL RESERVE VS MAS

Introduction of 3rd Central Bank:

Sunnysideup.com

SUNNYSIDEUP

Population: 150 million

GDP: $7.4 trillion

Completely independent of government Not affected by the financial crisis

Unemployment rate: 2.1%

Inflation rate: 1.9%

INDEPENDENCE FROM GOVERNMENT

The Federal Reserve

Public/private structure Fiscally independent of the government Monetary policy or foreign exchange policy cannot be audited Granted broad discretion to interpret and carry out that mandate as it sees fit on a day-to-day basis

INDEPENDENCE FROM GOVERNMENT

MAS
Considerable operational autonomy Board of Directors held responsible for the policy and general administration of MAS Must inform the Government of the banking and credit policy of MAS

SHOULD CENTRAL BANKS BE INDEPENDENT

Necessary for the conduct of effective monetary policy.
If central banks were not independent of the government, under constant political pressure to boost the economy and reduce unemployment A certain degree of independence preferred

TOOLS USED
The Fed Open Market Operations Discount rate Reserve Requirements MAS Exchange rate policy Manages the S$ exchange rate against a basket of trade-weighted currencies of major trading partners and competitors

MORE ON EXCHANGE RATE POLICY

Suitable as due to small and open economy.
Basket of trade-weighted currencies of major trading partners and competitors periodically revised

Managed float regime for the Singapore dollar

MAS intervenes by buying or selling foreign currencies

REACTION TO THE FINANCIAL CRISIS (THE FED)

Revive corporate and consumer lending Creation of new money and lending it out Feds balance sheet increased from around $900 billion to more than $2 trillion Second round of Quantitative Easing to fight low inflation and high unemployment

REACTION TO THE FINANCIAL CRISIS (MAS)

Shifted to a zero-percent appreciation

Helped exporters boost competitiveness of exports as economy slid into recession in 2008

MOVING FORWARD

Greater Transparency
Publish a regular forecast of the Feds future decisions on interest rates Increase public understanding of its methods and goals Reduce unnecessary market volatility Minimize the costs of anti-inflation monetary policy

MOVING FORWARD
Increased Responsibilities of Central Banks
More responsibility for the supervision of banks and the stability of financial systems Rather taxing as they struggle to keep up with the expectations that the public has for them Conflicting nature of some goals can also become a burden Focus on one primary goal of price stability instead?