Institutional Comparison of Fed and ECB Term Paper

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Fed and the European Central Bank: A Comparison

The Federal Reserve System of the United States and the Eurosystem of European Union are one of the key financial institutions of the global economy. Their policies and decisions influence almost every market in the world and this is the reason that an increased level of attention has been devoted towards these two central banks. The two systems have several differences as well as similarities with respect to their organizational policies & objectives, organizational structure and the decision making process.

Organizational Objectives:

The primary difference between the two institutions is that of their goals and objectives. The European Central Bank or the "Eurosystem" mainly focuses towards the maintenance of price stability in the region and implements suitable regulations in this regard. On the other hand, the Fed not only focuses on the issue of price stability but also aims to increase the rate of employment, increase investment in the region and maintain an acceptable long-term rate of interest. This difference in organizational objectives are basically because of different economic challenges faced by the two regions and due to the difference in their organizational philosophies. The establishment of European Central Bank is mainly because of very high inflation level in some parts of Europe and this is the reason that the ECB focuses on maintaining price stability. On the other hand, American's experience of the Great Depression has forced them to adopt preventive measures in order to keep the unemployment rate at the minimum and to maintain a moderate interest rate. Finally, several studies conducted by the Europeans suggest that price stability should be at the center of a country's monetary policy.

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Organizational Structures:

The most important difference in the organizational structure of the two institutions is that the Fed was established for a single country while the ECB was created for the management and control of the monetary policies of twelve different nations of Europe. Because of this key difference in their organizational structures, ECB is more decentralized as compared to the Fed. Majority of the decision-making in the Eurosystem is done at the national level, especially in terms of a country's monetary policy. On the other hand, the Federal Reserve System tends to operate under a centralized authority. However, there are some decision areas in which decision-making is decentralized in Fed. One reason for keeping decentralized operations of ECB is that a centralized operation is not acceptable for many countries, as they want to maintain some level of control over their monetary system.

Decision Making Process:

As far as the issue of decision-making is concerned, the Eurosystem is more decentralized as compared to the U.S. Federal Reserve System. The Board members of the Fed have considerable authority to make monetary policy decisions as compared to their European counterparts. In case of ECB, the central decision making authority is….....

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