Benefits of a Common Currency

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 (TABLE HERE) 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 1980 s

Is the EU an OCA?

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 supply shocks will find it more costly to join a monetary union Their cost line would shift upwards

Asymmetric Shocks (cont. )

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 policymakers 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

Costs and Benefits in the Long Run (cont. ) 13

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 15 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 16 members Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain (1999) Greece (2001); Slovenia (2007); Cyprus, Malta (2008), Slovakia (2009)

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 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. ) The position of the UK: 3. ● ● 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 1. 2. It is unlikely that the EU as a whole constitutes an OCA The number of countries that benefit from monetary union is probably larger than most economists thought just a few years ago 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: ● ● ● 2. ● ● 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: 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 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 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. )

European Central Bank (cont. ) ● ● ● Does the ECB have the strongest degree of accountability? Evidence suggests taht 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 ● 1. 2. In summary the accountability of the ECB is weak Absence of strong political institutions in Europe capable of exerting control over its performance As a result of the Treaty’s vagueness in defining its objectives the ECB has restricted its area of responsibility to inflation

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 e. Fed 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 2009 there are 16)

European Central Bank (cont. ) ● The governing bodies of the Eurosystem are: Executive Board: ● ● ● President (Jean-Claude Trichet, France) Vice-President (Lucas D. Papademos, Greece) 4 Directors of ECB Lorenzo Bini Smaghi, Italy Jose Manuel Gonzalez-Paremo, Spain Jürgen Stark, Germany Gertrude Tumpel-Gugerell, Austria

European Central Bank (cont. ) Governing Council: ● ● 6 members of the Executive Board Governors of the 16 NCBs

Members of Euroland 1. 2. 3. 4. 5. 6. 7. 8. Austria Belgium Cyprus Finland France Germany Greece Ireland 9. Italy 10. Luxembourg 11. Malta 12. Netherlands 13. Portugal 14. Slovakia 15. Slovenia 16. 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 20 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

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 decision-making 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 (16 out of 20 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 In analytical functions Staff (research, statistics, econ. ) ECB 600 100 -150 Bundesbank 17, 632 360 Banque de France 16, 917 750 Banca d’Italia 9, 307 300

European Central Bank (cont. ) ● ● However, this should not be exaggerated In a recent study De. Grauwe 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 19 th 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)

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 38 th 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 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 Harmonization with European Central Banking System Law (ECB’s president appointed for 8 non-renewable years) 1990 – Governor’s appointment period re-extended to 5 years 2001 – Governor’s appointment period re-extended to 5 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 ● Durmuş Yılmaz – (since 18 April 2006) 61 y. o. , public sector experience since 1980, graduate degree in economics Members of the Bank Council M. Vehbi Çıtak – (since 1 May 2005) 50 y. o. , lawyer with graduate degree in social sciences Doç. Dr. Lokman Gündüz – (since 1 May 2005) 40 y. o. , Ph. D in banking Prof. Dr. M. İlker Parasız – (since 1 May 2003) 65 y. o. , Ph. D in law and economics Necati Şahin – (since 1 May 2004) 53 y. o. , undergraduate degree in economics Prof. Dr. Necdet Şensoy – (since 7 December 2006) 54 y. o. , Ph. D in accounting Prof. Dr. Turalay Kenç – (since 14 April 2009) 46 y. o. , Ph. D in economics

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