Benefits of a Common Currency
 Costs have to do with macroeconomic management of
the economy
 Benefits have to do with the microeconomic aspect
 Eliminating national currencies for a common
currency leads to economic efficiency gains
 Elimination of transaction costs
 Elimination of exchange rate risk
Benefits of a Common Currency
(cont.)
1.
Direct gains from the elimination of transaction
costs
●
●
●
Eliminating the costs of exchanging one currency into
another is themost visible gain from a monetary union
E.C. Estimates these gains between €13-20 billion/year
Of course banks will lose revenue they get for
exchanging national currencies in a monetary union
Benefits of a Common Currency
(cont.)
2.
Indirect gains from the elimination of transaction
costs
●
●
The scope for price discrimination between national
markets will be reduced
The unification of currency along with the other
measures in creating a single market will make price
discrimination more difficult

This is a benefit to the European consumer
Benefits of a Common Currency
(cont.)
3.
Welfare gains from less uncertainty
●
The uncertainty about future exchange rate cahnges
introduces uncertainty about future firm revenues
●
Welfare of firms will increase when common currency
is introduced (exception: firms taht make money by
taking on risk)
Benefits of a Common Currency
(cont.)
4. Exchange Rate Uncertainty and the Price
Mechanism
●
Exchange rate uncertainty introduces uncertainty
about the future prices of goods and services
●
Movement towards a common currency will eliminate
the exchange risk and lead to a more efficient working
of the price mechanism
Benefits of a Common Currency
(cont.)
5.
Exchange Rate Uncertainty and Economic Growth

The elimination of the exchange risk will lead to an
increase in economic growth (the EC argument)

However, this view lacks empirical data
Benefits of a Common Currency
(cont.)
6.
Benefits of An International Currency

When countries form a monetary union the new currency
will likely weigh more in international monetary relations
than the sum of individual currencies prior to the Union

The currency is likely to find use outside of the union

This creates additional benefits to the union:

Issuer of currency obtains additional revenues

It will boost activity for domestic financial markets (foreign
residents will want to invest – this creates know-how and jobs &
financial institutions will have new opportunities
Benefits of a Common Currency (cont.)
7.
Benefits of a Monetary Union and the Openness of
Countries



The welfare gains of a monetary union are likely to
increase with the degree of openness of an economy
Ex: elimination of transaction costs will benefit those
countries that buy and sell a large number of goods and
services in foreign countries
With an increasing openness towards the other partners
in the Union, the gains from a monetary union (per
uniot of output increases)
Costs and Benefits Compared
Costs and Benefits Compared
(cont.)
 The importance of costs and benfits depends on one’s
view about the effectiveness of the exhange rate
instrument
 Monetarist View:
 Exchange rate changes are ineffective as instruments to
correct for these different developments between
countries
 Even if they are effective they make countries worse off
Monetarist View
Keynesian View
 The world is full of rigidities (wages and prices are
rigid, labor is immobile) – this makes the exchange
rate a powerful instrument
 Mundell’s original theory represents this very well
 Few countries would benefit from a monetary union
 Large countries with one currency would be better off
(economically) splitting the country into different
monetary zones
Keynesian View
Monetarist View and Keynesian
View
Compared
 The monetarist view has been in favor with
economists since the early 1980s
Is the EU an OCA?
Intra-Union
Exports of
EU Countries
(% GDP) in 2007
Belgium/Lux.
68.7%
Denmark
23,1
Slovakia
67,1
Sweden
22,8
Czech Rep.
60
Latvia
22
Netherlands
55,3
Finland
20,8
Hungary
54,3
Malta
19,5
Slovenia
44.2
Portugal
17,7
Estonia
36,9
Italy
14
Austria
32
France
13,9
Ireland
29,5
Spain
11,7
Lithuania
28,5
United Kingdom
9,1
Poland
26,1
Greece
4,9
Germany
25,9
Cyprus
4,7
Is the EU and OCA? (cont.)
 Large differences in openness of EU countries with the
rest of the Union
 Cost-benefit graph will be different for each country
 Most beneficial for the most open countries (ex. Benelux,
Ireland)
 For other countries like Italy with lower openness, their
authorities obviously did not consider the loss of the exchange
rate instrument costly and therefore decided to join the Union
Price and Wage Rigidities, Labor
Mobility
and
Monetary
Union
 Cost-Benefit calculus of a monetary union is also influenced
by the degree of wage and price rigidities
Price and Wage Rigidities, Labor Mobility and
Monetary Union (cont.)
 An increase in the degree of mobility of labor shifts
the cost curve to the left and makes the monetary
union more attractive
 Single market with labor mobility makes the EMU more
attractive
 However, regional concentration of industrial activities
(like that of auto production in one country) would shift
the cost curve upwards
Asymmetric Shocks and Labor
Market Flexibility
 The size and frequency of asymmetric shocks also
matters for the attractivenss of a monetary union
 Countries that have very different demand and supply
shocks will find it more costly to join a monetary
union
 Their cost line would shift upwards
Asymmetric Shocks (cont.)
17
6
17
6
2011
Asymmetric Shocks (cont.)
 Countries (regions) that experience a high divergence in
output and employment growth need a lot of flexibility in
their labor markets if they want to benefit from a
monetary union
 As the degree of divergence goes up – the greater the need
for flexibility in labor markets
 This relationship is shown by the line AA
 Empirically, EU-15 (and EU-27) as a whole is located above the
AA line – from an economic point of view, a monetary union is
a bad idea
 However, there is a subset of countries which do form an OCA
(EU-5: Benelux, Germany and France)
Is the EU an OCA?


1.
The challenge for the EU is to move to the other side of
the AA line
Two strategies:
Reduce the degree of real divergence

2.
Increase the degree of flexibility


Difficulty: dependent on factors over which policy-makers
have little influence (ex: industrial specialization)
Requires reform of labor market institutions (difficult but
necessary)
However, by moving towards closer political
unification asymmetric shocks could be reduced
Labor Unions and Monetary Union
 Role of labor unions in determining the cost of a monetary union
is significant
 Presence of asymmetric shocks:
 wages shoudl be flexible
 Centralized wage bargaining harmful
 ex: German unification (E. German firms did not survive the shock of
unification)
 Presence of symmetric shocks:
 Wages should be more uniform across countries
 Wage bargaining is still not desirable because:
 Asymmetric shocks less likely in unified Europe but regional specializaiton could
lead to asymmetries
 Uneven changes in output and employment between sectors (sectors with less
favorable developments would suffer)
 Future organization of labor unions in a monetary union will
have to respect the requirements of flexibility
Costs and Benefits in the Long Run
17
6
Costs and Benefits in the Long
Run (cont.)
17
13
6
The Challenge of Enlargement of
EMU
 Since Eurozone is in existence the question of whether
or not it is optimal is academic
 Still important to know, however, whether or not the
beneifts of the union exceed the costs for the 17 members
 If costs do not exceed benefits individual members will
be quite unhappy with the ECB
 Enlargement of the EMU may exacerbate problems of
ECB
 Present Eurozone consists of 17 members
 Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, Netherlands, Portugal, Spain (1999)
 Greece (2001); Slovenia (2007); Cyprus, Malta (2008),
Slovakia (2009), Estonia (2011)
The Challenge of the Enlargement
of the EMU (cont.)
 Denmark, Sweden and the UK have not yet joined the
EMU
 Will all of these countries bring the enlarged
Eurozone closer to an optimal currency area?
 Degree of Openness:



Central European countries are at least as open towards the EU
as the EU countries themselves
Central European countries appear to be more integrated with
the EU than Denmark, Sweden and the UK
Thus, in terms of openness, the Central European countries
would fit quite well into the existing EMU
The Challenge of the Enlargement
of the EMU (cont.)

Asymmetry of Shocks:

1.
Study of Korhonen and Fidrmuc (2001) analyzed the correlation
of demand and supply shocks with the average of the union for
the EU states and candidates
Study finds high correlations of the large coutnries (France, Italy
and Germany) with the euro area

2.
Not surprising since these large coutnries make up a significant part of
the Union
Although some Central European countries (Hungary and
Estonia) are well correlated with the euro area, this is much less
the case with others

A large number of states have negative correlations of their demand
shocks (Lithuania, Latvia, Czech Republic, Slovenia and Slovakia)


This could be because these states pursue independent monetary policies –
once in the Union this source of asymmetric shocks will dissapear
But the supply shock negative correlation is unlikely to disappear
The Challenge of the Enlargement
of the EMU (cont.)
3.
The position of the UK:
●
●

Correlation of demand shock is also negative – this reflects UK’s
pursuit of its own national monetary policies quite
independently from what happens in the Euro area
Correlation of the supply shock is also quite low
Conclusions:
●
It is not clear that all countries in the sample are part of an OCA
with the rest of the EU

●
(most evident for the UK) – low trade with the euro area and is more
subjected to asymmetric shocks than other large members of the
Union – hesitation of the UK to enter the EMU is understandable
Despite the openness of the Central European states to the EU
many of these countries are still subjected to relatively large
asymmetric shocks

Some of these countries may still enter the EMU however as the best
possible way to import monetary and price stability
Conclusions
It is unlikely that the EU as a whole constitutes an
OCA
2. The number of countries that benefit from
monetary union is probably larger than most
economists thought just a few years ago
1.

3.
As the years increase, monetary union will become a
more attractive option for most, if not all EU countries
Even the countries that are net gainers from a
monetary union take a risk by joining the union

When large shocks occur they will find it more
difficult to adjust
European Central Bank

1.

In the postwar period 2 models of central banking have evolved:
Anglo-French model
Objectives:

Central banks pursue several objectives:





Price stabilization
Stabilization of the business cycle
Maintenance of high employment
Financial stability
Institutional Design:


Political dependence of central bank
Monetary decisions are subject to the governments approval
German model
Objectives:
2.



Only one objective: Price Stability
Institutional Design:

Political Independence – no interference from political authorities
European Central Bank (cont.)
 When the European nations negotiated the Maastricht
Treaty a choice between these two models had to be
made and the German model prevailed as the choice for
the ECB
 ECB objectives:
 Article 105 of Maastricht Treaty states that it is “price
stability”
 Article 2 includes a “high level of employment”

Treaty recognizes the need to follow other objectives as well, but
they are seen as secondary to “price stability”
 Treaty is also clear on the need for political independence of
the ECB

In the absence of this independence the central bank can be
forced to print money to cover deficits – this would lead to
inflation
European Central Bank (cont.)
 The Bundesbank is clearly the model for the ECB,
however, the ECB is tougher on inflation and political
inflation than the Bundesbank was
 Reason: a simple majority in German parliament can
change the status of the Bundesbank, changes in the ECB
are much more difficult

They can only occur by a revision of the Maastricht Treaty
requiring unanimity among all EU-member states, including
those that are not members of EMU
European Central Bank (cont.)



1.
The success of the German model is intriguing
When the EU countries negotiated the
Maastricht Treaty, the Anglo-French model
prevailed in almost all of the EU-member states
It was rejected for the German model because:
Intellectual Development





The reaction to Keynes: the monetarist view erupted
It was felt that unemployment could not be lowered
below its natural rate without creating inflation
Lowering unemployment below natural rate could only
be achieved with structural policies like more flexibility
in labor aned lower taxes
The central banks should only concentrate on what they
can control: PRICES
It was demonstrated taht countries whose central
banks were politically independent managed their
economies better (lower inflation without high
unemployment or lower growth
European Central Bank (cont.)
2.
Strategic Position of Germany in the EMU Process



Germany faced the risk of having to accept higher
inflation when they entered a monetary union
In order to reduce this risk they insisted on creating a
central bank tough on inflation
In order to accept the EMU Germany insisted on
having an ECB like the Bundesbank
European Central Bank (cont.)
 ECB was thus modelled on the German Bundesbank
with a strong mandate for price stability and weak
responsibility for stabilizing output and employment
functions
 “conservative” central bank – an institution that attaches
greater weight to price stability and lesser weight to
output and employment stabilization than the rest of
society
European
Central
Bank
(cont.)
 This leads to a conflict:
 In hard times such as an unexpected recession taht increases
unemployment the ECB will do little in terms of expansionary
policies or less than what the society wants it to do
 This represents a conflict between the ECB and elected
politicians who represent the society
 ECB will argue this gives them greater credibility because of their
reluctance to yield to political pressure
 This leads to a trade-off between credibility and stabilization
European Central Bank (cont.)
 For the ECB monetary policies should not be used to
lower unemployment below the natural unemployment
 Politicians should do this by lowering taxes on labor and
introducing flexibility in the labor market
 The question and the problem is: “WHAT DOES THE
ECB SEE AS THE NATURAL UNEMPLOYMENT RATE?”
and is it correct in its assesment?
European Central Bank (cont.)
 The Maastricht Treaty gave a mandate to the ECB to
maintain price stability but also stabilize output and
employment (provided this does not endanger price
stability)
 A wall was erected around the ECB to protect it from
political interference so it could accomplish these objectives
 Although there are good reasons for independence there are
also problems associated with it – mainly, its lack of
accountability
 It is possible for the ECB to make a mistake, for ex to
miscalculate the natural unemployment rate and therefore
fail to stabilize output and employment while it could do so
without endangering price stability
European Central Bank (cont.)
 There needs to be a mechanism to check that the ECB
fulfills its mandate and applies sanctions if this is not
the case
 If the government decided about interest rates there
would be no need for accountability of the central
bank
 If the central bank has lots of power then there is a
corresponding need for accountability since the
government is accountable to the voters
 Independence and accountability are part of the
delagation of powers granted by voters
European Central Bank (cont.)
Bundesbank
Federal Reserve
European Central Bank (cont.)
 Does the ECB have the strongest degree of accountability?
 Evidence suggests that it is less well developed than that
of the Federal Reserve Banking System of the USA (the
Fed)
 Although both presidents of these two banks face the
parliament regularly the chairman of the Fed faces an
institution that can change the status of the Fed by a
simple majority – therefore he needs to pay attention to
the opinions of Congressmen
European Central Bank (cont.)
 When the president of the ECB appears before
parliament they have no power to change its status – it
can only be changed by changing the Treaty requiring
a unanimity of all EU states – ECB has much more
power
 Thus ECB has lots of independence but not a
corresponding degree of accountability
European Central Bank (cont.)
 The other issue of accountability rises from the ECB’s
objectives – they are not clearly defined
 Although price stability is given as its objective it was
not given a precise content making it possible for the
ECB to define it itself
 The other objectives of the ECB (provided price
stability is achieved) have been left very vague
 If this strategy of the ECB is successful it will only
really be responsible for its performance against
inflation
European Central Bank (cont.)
 For ex. The Fed is responsible for movements in
employment, mandated by law – unlike the ECB – the
Fed has greater responsibility
 The primary responsibilities of the Fed:
 conducting the nation’s monetary policy to help maintain
employment, keep prices stable, and keep interest rates
relatively low
 supervising and regulating banking institutions to make
sure they are safe places for people to keep their money and
to protect consumers’ credit rights.
 providing financial services to depository institutions, the
U.S. government, and foreign central banks, including
playing a major role in clearing checks, processing
electronic payments, and distributing coin and paper
money to the nation's banks, credit unions, savings and
loan associations, and savings banks.
The Federal Reserve System
 The central bank of the United States
 Created by Congress in 1913
 Consists of a network of twelve Federal Reserve Banks
and a number of branches under the general oversight
of the Board of Governors. The Reserve Banks are the
operating arms of the central bank
The Federal Reserve System
Districts
European Central Bank

In summary the accountability of the ECB is weak
Absence of strong political institutions in Europe
capable of exerting control over its performance
2. As a result of the Treaty’s vagueness in defining its
objectives the ECB has restricted its area of
responsibility to inflation
1.
European Central Bank (cont.)
 This creates a long-term problem for the political support
of the ECB
 Most central banks are responsible for macroeconomic
stability: reducing business cycle fluctuations, avoiding
deflation, managing financial stability,...
 Difficult to see how European politicians will continue to
support an institution to which great power has been
delegated and over which they have so little control
European Central Bank (cont.)
 Some things the ECB can do to avoid this:
 To compensate for the lack of formal accoutnability it
could enahnce informal accountability, ex. Have greater
transparency (for ex – the ECB can inform the public
about its objectives and how it will achieve them and
openness in the decision-making process

The ECB has tried to do this with its monthly reports and press
conferences by the ECB president
 Publish the minutes of its meeting like th eFed showing
the voting of members – but the ECB says it cannot due
to an article in the Treaty that prohibits it from doing so
 ECB could broaden its responsibility
 ECB should announce its estimate for the natural
unemployment rate giving the public something to
measure it by
European Central Bank (cont.)
 Institutional Framework of the ECB:
 The continuing importance of nation-states in the EU
made it necessary to construct monetary institutions for
Euroland that are sufficiently decentralized and yet
maintain unity in the conduct of monetary policy
 The institutions of Euroland were established in the
Maastricht Treaty.
 Monetary policy is entrusted to the Eurosystem which
consists of:


ECB
National Central Banks (NCBs) of the EU countries in the
EMU (in 2013 there are 17)
European Central Bank (cont.)
 The governing bodies of the Eurosystem are:
 Executive Board:



President (Mario Draghi, Italy)
Vice-President (Vitor Constancio, Portugal)
4 Directors of ECB
 Jörg Asmussen, Germany
 Yves Mersch,Luxembourg
 Benoit Coeure, France
 Peter Praet, Belgium
European Central Bank (cont.)
 Governing Council:


6 members of the Executive Board
Governors of the 17 NCBs
Members of Euroland
1.
2.
3.
4.
5.
6.
7.
8.
9.
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
Ireland
10.
11.
12.
13.
14.
15.
16.
17.
Italy
Luxembourg
Malta
Netherlands
Portugal
Slovakia
Slovenia
Spain
European Central Bank (cont.)
 Governing Council:
 Main decision-making body of the Eurosystem
 It formulates monetary policies and takes decisions
concerning interest rates, reserve requirements and the
provision of liquidity
 Meets every 2 weeks in Frankfurt
 Each of the 23 members has one vote
 Executive board implements the monetary policy
decisions of the Governing Council


Gives instructions to the NCBs
Sets agenda for the meetings of the Governing Council
European Central Bank
17
17
European Central Bank (cont.)
 The whole decision-making structure is called the
Eurosystem
 ECB is only a part of this system and cannot take
decisions on its own about monetary policies
 The national banks are fully involved in the decisionmaking process
 Decisions are then implemented by the ECB
 NCBs then carry out the decisions in their own
markets
European Central Bank (cont.)
 The question is whether or not this system is too
decentralized
 The NCBs in the Governing Council have a clear
majority (17 out of 23 members)
 This contrasts with other decentralized central banks
 For ex. The US Fed’s decision-making body is the
Board of Governors
 12 members where 5 are presidents of regional banks
(representing regional interests in minority position) –
the other 7 members are appointed by Congress to
represent the interests of the system as a whole
European Central Bank (cont.)
 The ECB is small (employee-wise) in contrast to the
national banks
 It is possible for the NCBs to analyze issues to their
national advantage
Staff at ECB and NCBs
Total Staff In analytical functions
(research, statistics, econ.)
ECB
600
100-150
Bundesbank
17,632
360
Banque de France
16,917
750
Banca d’Italia
9,307
300
Banco de Espana
3,269
350
Nederlandsche Bank 1,721
165
Note: NCB data refers to 1995
European Central Bank (cont.)
 However, this should not be exaggerated
 In a recent study DeGrauwe et al concluded that in case of
an asymmetric shock even if all the NCBs acted in their
own national interest, as long as the Executive Board took
a Euroland perspective, the outcome would not be biased
in favor of one country or another
 Even though the Executive Board has minority voting
since the NCBs will want different things the Executive
Board ends up with the majority
 This may not always be the case if the different governors
end up in coalitions
European Central Bank (cont.)
 One of the most peculiar features of Euroland’s
monetary system is the fact that while monetary
policy was entrusted to a European institution, the
responsibility for banking supervision was kept firmly
in the hands of nation states
 This could lead to problems
European Central Bank (cont.)

1.
Bank Regulation and Supervision were set out in an EC
Directive prior to the signing of the Maastricht Treaty:
Responsibility for the supervision of banks entrusted to
the authorities of the coutnry where the banks have
their head office



The principle of “home country control”
Ex. Deutsche Bank is supervised by the German
supervisory authority
This also means Germany is responsible for supervising the
Deutsche Bank branches in other countries
European Central Bank (cont.)
2.
Host Country is responsible for financial stability in
its own market


“host country responsibility”
Ex. France is responsible for stability of all banks in
France (including foreign ones)

As long as the national banks remain within
national borders there is not much of a problem

However, the degree of segmentation in the
banking sector is very large

The cross-border M&A activity is expected to
increase
Mergers and Acquisitions in the EU
Banking Sector
Example of Banking Crisis
 Example of a possible crisis:
 It is possible that in the near future 50% or more of the
banks operating in Italy will be branches of banks from
another country (ex. Germany, France,...)
 The Italian monetary authorities will be responsible for
the stability of the banking sector in Italy and will need
information on the soundness of these banks and will
need to acquire this informaiton from supervisory
institutions in the other country (Germany, France,...)
Example of Banking Crisis (cont.)
 Will this information be provided in a timely manner?
 Will all necessary information be disclosed? (Most
countries do not like to give out negative information on
their banks)
 It is possible that Italy will be badly informed and this
will make it more difficult for Italy to provide the stability
it is supposed to
 Problem could be worse in a crisis
Example of Banking Crisis (cont.)
 Ex. Banking crisis happens in Italy and Italy needs to bail
out good banks that are in a liquidity crisis (“lender of last
resort”) and needs quick information
 If it does not get this information quickly it may hesitate
to lend to a good bank
 The crisis will get worse
 The ECB needs to take over this “lender of last resort”
function to prevent banking crises
Example of Banking Crisis (cont.)

Banking Crisis:


Failure of a bank with bad loans, a run on other sound
banks by deposit-holders threatening the closure of
these banks as well
Lender of Last Resort:

1.
2.
Walter Bagehot (famous 19th century English economist)
defined the principles that central banks should follow
to prevent a banking crisis:
The central bank should lend without limits to sound
but illiquid banks (lender of last resort)
The insolvent banks should either be allowed to fail or
should be restructured whereby the bad loans are taken
out of the failing bank and the remaining sound
portfolio is placed in a new and recapitulated bank
(usually the taxpayer will foot such a bill)
The New Financial Regulatory and
Supervisory Structure in the EU
 Banking crisis of 2008:
 Caused a major overhaul of the way banks and financial
markets are regulated and supervised in the Eurozone
and the EU
 New framework applies to all EU countries and is not
restricted to the Eurozone countries
 The President of the ECB has been given the task of
analyzing sources of potential systemic risks that may
affect the financial system and issuing early warnings
of impending problems
 The board has no executive power
European Systemic Risk Board
(ESRB)
European Banking
Authority (EBA)
(London)
European Insurance
and Occupational
Pensions Authority
(EIOPA) (Frankfurt)
European Security
and Markets
Authority (ESMA)
(Paris)
National
Banking
Supervisors
National
Insurance
Supervisors
National
Securities
Supervisors
As of January 1, 2011
Conclusion
 Eurosystem is unique
 Compromise between national banks and unified
decision-making
 Its shortcomings:
 Lack of accountability
 The decentralization of the ECB making it difficult for
supervision to prevent and manage financial crises
Turkish Central Bank (TCMB)
 Lesson will seek to answer the following questions:
 When was the TCMB formed
 How was the TCMB formed
 Why was the TCMB formed
The Birth of the TCMB
 Central Banking born out of need to provide war
financing in many states
 The central bank of the Ottoman State was born due
to similar reasons however it was somewhat different
in institutional and ownership status
 The Crimean War of 1853 was the beginning of the
financial bankruptcy of the Ottoman Empire
 The Ottoman State attempted to finance the war with
domestic and foreign borrowing
TCMB
 This led to the first foreign borrowing of the Ottoman
Empire
 1854 – the Ottoman Treasury sought long term debt in
the European financial markets of London, Paris and
Vienna
 1863 – Osmanli Bankasi (Bank-ı Osmani-i Şahane)
formed by British and French capital to aid in Ottoman
debt repayment
 The Bank had the right and monopoly to print money
TCMB
 The Bank would borrow at low interest in the European
markets and increase its gold reserves and print three
times the amount of its reserves and give the
government capital advances in exchange for interest
 Although the Bank operated with profit, the Ottoman
state was not allowed to share in the profit
 1875 – the Ottoman state declared that it would default
on foreign debt
 1881 – Düyun-ı Umumiye İdaresi (Debt Management
Administration) formed with the duty of managing the
Ottoman state’s foreign debt
TCMB
 The formation of the Duyun-i Umumiye İdaresi
signaled the symbolic end of the Ottoman state
 This trauma helped shape the economic politics of
the new Turkish republic in 1923
 i.e. Avoidance of foreign debt and budget deficits
 These concepts also influenced the institutional
structure of the central bank during 1930-1950
TCMB
 The absence of a national central bank as the symbol of
economic independence became a major problem of
the Ankara government especially during the War of
Independence
 Problems created by this deficiency
 The rejection of the Ottoman bank formed by foreign capital
to provide war financing during WWI
 High inflation and the havoc it brought on society
 The constant depreciation of the Turkish Lira
 1925-1930 : the ideological foundations of a new central
bank for the new Turkish state planted
TCMB
 The endeavor to create the central bank brought about
restlessness in the two major banks, İş Bankası and
Osmanlı Bankası
 Türkiye İş Bankası supported the creation of the new
institution

The General Manager of Is Bankasi, Celal Bayar, declared that he was
ready to turn Is Bankasi into the new central bank
 Osmanlı Bankası, opposed the new institution because it did
not want to lose its privileges in printing money and stated
that the new institution should be formed with foreign capital
and that the new state should provide its financial stability
with foreign borrowing
TCMB
 Osmanli Bankasi’s wishes would have led the new state to lose its
economic independence
 The new leaders of the Republic decided to repay the Duyum-i
Umumiye debt without foreign borrowing
 This allowed for the new central bank to replace the Osmanli
Bankasi which lost its priveleged status
 1930 – the Central Bank Law passed in the Turkish Parliament
 The new institution took over the government’s domestic and foreign
exchange and treasury operations
 3 October 1931 – the Turkish Republic Central Bank (TCMB)
formally began its operations as the 38th central bank in the
world
 Other central banks formed after this period:

New Zealand (1933); Canada (1934); Ireland (1943); Australia (1945)
Political Independence of the TCMB
 1930 – the Governor of the Bank Council – appointed
for 5 years with the option of renewal by the President
of the Republic
 1970 – the law was changed to allow the upper level
management to be appointed after the Bank Council
declared the candidates and the Council decided on
appointments
 Today – the Governor of the TCMB is appointed byt eh
Cabinet of Ministers and the deputies are appointed
from the Governor’s choice of 3 candidates
 Since the Governor and his deputies are not appointed at the same tme the
government can shape the members of upper management
Political Independence
 After 1987 elections – the individual independence of
the TCMB Governor was damaged
 Governor and deputies’s duty period reduced to 3 years
 1990 – Governor’s appointment period re-extended to 5
years
 2001 – Governor’s appointment period re-extended to 5
years
 Harmonization with European Central Banking System Law
(ECB’s president appointed for 8 non-renewable years)
Political Independence
 1930 – no specific education requirement for Governor and top 4
executives
 1970 – mandate that Governor should have higher education with
experience and knowledge in finance, economics and banking
 Governor should have higher eduation in social sciences with previous
experience in the public sector
 Deputies should have an undergraduate or graduate degree in either law,
finance, economics, management or banking along with adequate
experience and knowledge and at least 10 years experience
 Since 1970 – the Bank’s Council is composed of 6 people selected
by the Governor and General Council of the Bank
Institutional Structure of the TCMB
TCMB
 President of the TCMB
 Assoc. Prof. Dr. Erdem Başçı– (since 19 April 2011) 47 y.o., PhD in
Economics
 Members of the Bank Council
 Assoc. Prof. Dr. Ahmet Faruk Aysan – (since November 2011) 36 y.o., PhD





in Economics
M. Vehbi Çıtak – (since 1 May 2005) 53 y.o., lawyer with graduate degree in
social sciences
Assoc. Prof. Dr. Lokman Gündüz – (since 1 May 2005) 43 y.o., PhD in
banking
Prof. Dr. Sabri Orman – (since November 2011) 65 y.o., PhD in Economics
Prof. Dr. Necdet Şensoy – (since 7 December 2006) 59 y.o., PhD in
accounting
Abdullah Yalçın– (since 1 May 2012) 60 y.o., degree in accounting and
master’s in finance, former head of Etibank and auditor at Ziraat Bankası
Aims of the TCMB
TCMB
 The primary aim and priority of the TCMB pre-1986 was
to support the government’s development program
 With the changes in the foreign exchange and
convertibility of the Turkish lira the aim of price
stability became a major goal of the TCMB
 Law No. 19126 of 3 June 1986:
 “ekonomik gelişmeye yardımcı olmak amacıyla; para ve kredi
politikasını, kalkınma planları ve yıllık programlar göz
önünde bulundurularak ekonominin gereklerine göre ve fiyat
istikrarını sağlayacak bir tarzda yürütmektir.”
TCMB
 2001 – new law lists the primary aim of the Bank as
price stability
 Provided that price stability is achieved the Bank can
support the government’s growth and employment
policies
 The Bank determines the inflation target with the
government


Co-responsibility of the government and the Central Bank
The EU Progress reports criticize this aspect stating that it
damages the independence of the Central Bank and does not
conform to EU norms
TCMB
 The government does not have power over the
formation of the budget of the TCMB
 However the government must approve the TCMB’s
budget
 This limits the economic independence of the Bank
 The TCMB can also be audited by the Prime Ministry
 This is incompatible with the European Central Banking
System norms